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Parimutuel Applications In Finance : New Markets for New Risks - Ken Baron

Parimutuel Applications In Finance

New Markets for New Risks

Hardcover Published: 1st July 2005
ISBN: 9781403939500
Number Of Pages: 278

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Financial intermediaries supply derivatives to their customers when they can hedge the exposures from these transactions. A static hedge is typically employed by arranging an offsetting transaction with a different customer or a dynamic hedge by trading in the underlying derivatives. There is however a broad range of uncertain exposures where intermediaries tend not to offer derivatives or risk management products, as they are unable to hedge the resulting exposures. Baron and Lange suggest a parimutuel auction system adapted from the betting industry as a solution to this problem. They introduce the parimutuel mechanism and the modifications required to apply the mechanism to the capital markets. The PDCA auction and its mechanics are analyzed and finally the mathematics behind the system are described and illustrated. Includes a forward by Robert J. Shiller, the Stanley B. Resor Professor of Economics, Yale University

'This is the most exciting story of financial innovation ever told by the innovators themselves. Baron and Lange designed an exciting new method for the simultaneous auctioning of a family of derivative securities whose payoffs depend on the future outcome of an economic variable of interest to hedgers and speculators. Their insight was that a parimutuel format would conserve liquidity across the different derivatives, rather than split it among them. Then they developed the market as a business, and wrote the book! This is financial engineering at its best, both colorful and rigorous. I highly recommend it to any student of derivative securities or financial market design. It will be a classic for years to come.' - Darrell Duffie, the James I. Miller Professor of Finance at the Graduate School of Business, Stanford University.

'The parimutuel concept is an exciting one that the world is only just beginning to appreciate. This book is the definitive treatise on this technology, as it is emerging today, and as it will be developed in the future. It is a book to be studied over future years as markets proliferate and become more and more important in our lives.' - Extract from the forward by Professor Robert Shiller.

Introduction to derivativesp. 3
Introduction to parimutuel matchingp. 11
Parimutuel applicationsp. 33
A case study using nonfarm payrollsp. 49
Derivative strategies and customer ordersp. 77
The parimutuel equilibriump. 100
The solution algorithm for the parimutuel equilibrium problemp. 135
Mathematical properties of parimutuel equilibrium pricesp. 171
Mathematical properties of customer fills in the parimutuel equilibriump. 204
Table of Contents provided by Blackwell. All Rights Reserved.

ISBN: 9781403939500
ISBN-10: 1403939500
Series: Finance and Capital Markets Series
Audience: Professional
Format: Hardcover
Language: English
Number Of Pages: 278
Published: 1st July 2005
Publisher: Palgrave USA
Country of Publication: US
Dimensions (cm): 22.9 x 15.2  x 2.26
Weight (kg): 0.6
Edition Number: 1

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