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The
Pricing Efficiency of Equity Warrants: A Malaysian Case
--Razali
Haron
The
objective of this paper is to determine the pricing efficiency
and behavior of equity warrants traded in the Bursa Malaysia.
Specifically, this paper focuses on the studies of 85 randomly
selected samples of listed warrants (46 main board warrants,
while the remaining 39 were second board warrants) for the
trading period of 100 days from January 1, 2004 until May
31, 2004. The model for pricing of warrants in this study
is primarily based on the BlackScholes Option Pricing Model
(BSOPM). The theoretical price derived using the BSOPM is
then adjusted to incorporate the dilution effect. The adjusted
theoretical pricing is then compared with the actual market
prices of warrants to determine the pricing efficiency. The
paper also looks into related issues such as the extent of
mispricing, factors that could lead to the inefficiencies,
volatility of the warrants and the underlying stocks, the
behavior of price relationships and appropriate strategies
to be adopted with regard to the findings. The study concludes
that there is significant mispricing on most of the traded
warrants, which can be categorized as underpriced, overpriced
and extremely overpriced. A few warrants, nevertheless, are
found to be insignificantly mispriced.
©
2006 IUP . All Rights Reserved
Random
Walk and
Indian Equity Futures Market
--Kapil
Gupta and Balwinder Singh
This
study investigates the weak form efficiency in the Indian
equity futures market. For this purpose, the informational
efficiency of the Nifty futures and 24 stock futures is examined.
The Nifty and stock futures returns are found to be deviating
from normal distribution. The futures prices are found to
be nonstationary at levels, whereas first difference futures
returns are stationary. Empirical analysis finds evidence
of statistical dependence in the returns generating process.
Further analysis through the Autoregressive Integrated Moving
Average (ARIMA) process reveals that the Nifty and stock futures
returns are not independent and shows strong dependencies.
2006
IUP . All Rights Reserved
Informational
Content of the Basis and Price Discovery Role of Indian Futures
Market
--M
Kakati and R P Kakati
This
article examines two issues: (1) Price dynamics between spot
and futures prices for stock (i.e., whether futures market
leads the spot market or viseaversa in price discovery)
and (2) Informational content of the basis (i.e., whether
or not that information revealed by the basis has a signaling
role in determining the direction of change in spot and futures
prices). Using S&P CNX Nifty Index Futures, CNX IT index
and ten stock futures, it is found that the basis reveals
the direction of changes in futures prices and also to a much
lesser extent, that of cash/spot prices. The authors, however,
failed to find evidence that futures prices lead spot prices
on a daytoday basis. It appears that the information is
mostly aggregated in the spot markets and then transmitted
to the futures market. Bidirectional causality with moderate
feedback was noticed when longer lag periods are considered.
The futures market converges much faster than the spot market
does to the deviation of the equilibrium. Further, a major
percent of the information content of the basis in a given
day persist the following day; i.e., rate of convergence is
relatively slow.
2006
IUP . All Rights Reserved
To
Recover or Not to Recover: That is Not the Question
-- Lixin
Wu
In
the existing pricing theories, pricing of singlename credit
default swaps and their options make no reference to the prices
of defaultable bonds, the underlying assets of those derivatives.
This situation can cause price inefficiency and even generate
arbitrage opportunities across the markets. In this paper,
we introduce a new theory that treats the two markets as one
and thus ensures price consistency. The basic building blocks
of our theory are risky zerocoupon bonds backed by the coupons
of defaultable bonds. A market model for credit derivatives
is developed which bears high analogy to the LIBOR market
model. Compared with other existing theories, this theory
has two distinguished features. First, the recovery rate is
no longer required as an input. Second, credit default swaps
can be replicated statically by risky bonds and annuities.
This paper proves that the introduction of Credit Default
Swaps (CDS) has eliminated recoveryrate risk in the credit
markets.
2006 Lixin Wu. All Rights Reserved
Managing
Monsoon Risk in India Why Not Monsoon Derivatives?
--G
Kotreshwar
Monsoon
has been, and continues to be, one of the major sources of
risk impacting the Indian economy, especially in agriculture.
Food security for the nation must be accompanied by financial
security for the producers of food. The traditional crop insurance
program has proved very expensive and involves classical problems
of moral hazard and adverse selection. Indexbased insurance
is found to be a viable alternative to traditional crop insurance.
To realize its full potential, however, requires effective
convergence of insurance and financial markets via Special
Purpose Vehicles (SPVs), including monsoon derivatives. The
real challenge is to develop monsoon derivatives market that
would help efficient management of monsoon risk. This paper
aims at the conceptualization of monsoon derivatives by defining
the underlying variable in terms of Millimeter Rainfall Days
(MRDs). Further, the problem of pricing monsoon derivatives,
based on the distribution approach underlying the acturial
method by taking the data of a specific meteorological division
for a period of 50 years (19542003), is analyzed. Examples
of structures of some monsoon option contracts are also presented
in the paper.
2006
IUP . All Rights Reserved
Rainfall
Insurance with Derivatives
--Tapen
Sinha and Edgard Baqueiro
The
authors discuss rainfall insurance using financial derivatives.
Usual modeling is done for temperaturerelated products. They
have gathered rainfall data in Mexico City over a period of
five decades. This paper shows that the time series data is
stationary and normally distributed. Thus, they apply the
closed form solution proposed by Stephen Jewson (2003) to
value swaps, calls and puts (with and without limits). The
model can be used for practical purpose of pricing rainfall
derivatives.
2006
The Society of Actuaries, Schaumburg, Illinois. Reprinted
with permission
Research
Summary
Pricing
and Hedging of Oil Futures-- A Unified Approach
The
risk in pricing and hedging oil futures depends on the spot
prices of crude oil and future contracts for hedging the price
risk. A unified approach is being used for linking models
like convenience yield and expected spot price model.
2006
Wolfgang Bühler, Olaf Korn and Rainer Schobel. IUP holds the copyright for the summary |
