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KOSPI 200 index option market is one of the markets which is perfectly liquid in the world. While ATM options and OTM options are liquid, ITM options are not. This paper derives LDV (liquidity discount value) from the ITM options by using the no-arbitrage condition of synthetic futures considering market friction.

In this paper, we show that theoretically derived LDV is related to trading volume as standard proxy of liquidity measure and LDV in ITM options exhibit a U-shaped pattern across moneyness. Other findings are that the expected returns from the synthetic futures arbitrage trading considering liquidity premium exhibit a U-shaped pattern across moneyness and it depends on the maturity. This means that the longer days remaining to expiration date, the greater the incentive for arbitrage trading.

This paper conducts an empirical analysis to examine the tax effect on the basis (the difference between the futures price and the cash price) of KOSPI200 stock-index futures.

The standard cost-of-carry model relies on a simple non-arbitrage argument in which a trader replicates a “synthetic bond” with short in the futures and long in the underlying basket of cash stocks. While the synthetic bond provides the same or similar economic profiles as a normal interest-bearing instrument, the tax treatment for each is different under Korean tax code. The implicit taxes are expected to lower the before-tax rate of return on the synthetic bond, and thus to shrink the size of the basis.

The analysis indicates that implicit taxes are reflected and thus priced in the basis of KOSPI200 stock-index futures.

The KOSPI 200 options at its initial stage generated a significant number of violations in no-arbitrage conditions which involve both options and the underlying index. However, when the arbitrage conditions are formed independent of the underlying index, the average size of violation is not large and few arbitrage opportunities exist. There are more frequent violations on near-maturity days, with in-the-money options and larger violation sizes during opening and closing hours. The arbitrage opportunities remain intact even after realistic transaction costs are taken into account and index futures prices are used instead of the stock index in an alternative specification.

This paper provides a fuller characterization of the analytical upper bounds for American options than has been available to date. We establish properties required of analytical upper bounds without any direct reliance on the exercise boundary. A class of generalized European claims on the same underlying asset is then proposed as upper bounds. This set contains the existing closed form bounds of Margrabe, (1978) and Chen and Yeh (2002) as special cases and allows randomization of the maturity payoff. Owing to the European nature of the bounds, across-strike arbitrage conditions on option prices seem to carry over to the bounds. Among other things, European option spreads may be viewed as ratio positions on the early exercise option. To tighten the upper bound, we propose a quasi-bound that holds as an upper bound for most situations of interest and seems to offer considerable improvement over the currently available closed form bounds. As an approximation, the discounted value of Chen and Yeh's (2002) bound holds some promise. We also discuss implications for parametric and nonparametric empirical option pricing. Sample option quotes for the European (XEO) and the American (OEX) options on the S&P 100 Index appear well behaved with respect to the upper bound properties but the bid–ask spreads are too wide to permit a synthetic short position in the early exercise option.

The greatest revolution in financial management over the last 20 years must be the growth in the use of derivative securities. We can also consider this area to be part of the much larger concept of financial engineering. Limited in their use for many years, innovative financial institutions have now introduced derivatives of every colour and flavour. Principal driving forces in this growth have been:

Coupon and principal Separate Trading of Registered Interest and Principal Securities (STRIPS) maturing at the same date often trade at different yields. The paper aims to discuss this issue.

This paper analyzes for the first time the maturity structure of these differences for the US Treasury STRIPS market.

The paper surprisingly finds that short-term coupon STRIPS persistently trade at lower yields whereas long-term coupon STRIPS trade at higher yields compared to matched-maturity principal STRIPS.

An integrated analysis of Treasury STRIPS and the underlying notes market allows us to isolate two determinants: first, properties of the underlying notes that spill over to principal STRIPS, and second, the liquidity of coupon STRIPS measured by stripping activity and stripping volume.

This essay provides a non‐technical account of the development of thinking about the ways in which financial markets work. The account is organized by distinguishing between the “financial approach” and the “monetary approach” to the study of financial markets. The financial approach emphasizes the importance of arbitrage in determining financial asset prices. The monetary approach utilizes the more traditional tools of supply and demand, and places greater emphasis on the role of market imperfections. The essay evaluates the contribution of each approach to improving our understanding of financial markets. It concludes that the central problem in financial market research remains that of providing a satisfactory explanation of the determination of asset prices. In the emerging regime of liberalized, competitive financial markets both the financial approach and the monetary approach have a distinctive contribution to make in understanding how these markets work. This paper is based on research funded by the Economic and Social Research Council under grant No. B0023‐2151.

This study aims to examine the cross-market efficiency of the FTSE/MIB index options contracts traded on the Italian derivatives market (IDEM) during a period including the financial crisis between 1st October 2007 and 31st December 2012 using daily option prices.

Two fundamental no-arbitrage conditions were tested: the lower boundary condition (LBC) and the put–call parity (PCP) condition while taking into account the role of transaction costs in mitigating the number of violations reported. Ex post tests of LBC and PCP revealed a low incidence of mispricing in this market. Furthermore, to check the robustness of the results obtained by the ex post tests, ex ante tests were applied to PCP violations occurring within a one-day lag.

The results showed a significant drop in the number of profitable arbitrage strategies. The findings obtained from all these tests generally support the cross-market efficiency of the Italian index options market during the sample period, though some violations were occasionally reported. Overall, the number and monetary value of the violations reported declined during the post-financial crisis period compared to those during the financial crisis period.

This study can be extended to test the relationships between arbitrage profitability and other factors such as the moneyness (in the money, out of the money, at the money) of options and the maturity of options. Options market efficiency tests can be conducted such as call and put spreads, box spreads and put/call convexities (butterfly spreads).

There are several factors that influenced the decision to test the Italian index options market. First, the limited number of studies conducted on this market. Second, the fact that the two main studies on this market are relatively old, which makes it interesting to test the efficiency of this market with respect to a new set of data, taking into account the introduction of the Euro and the impact of the recent financial crisis on this market and whether the market efficiency hypothesis holds during the period of crisis. Third, it is important to consider the effect of the new rules applied to this market.

This paper provides a comprehensive overview of the gradual evolution of the supervisory policy adopted by the Basel Committee for the regulatory treatment of asset securitisation. The pathology of the new “securitisation framework” is carefully highlighted to facilitate a general understanding of what constitutes the current state of computing adequate capital requirements for securitised credit exposures. Although a simplified sensitivity analysis of the varying levels of capital charges depending on the security design of asset securitisation transactions is incorporated, the author does not engage in a profound analysis of the benefits and drawbacks implicated in the new securitisation framework.