A systematic approach to pricing and hedging international derivatives with interest rate risk: analysis of international derivatives under stochastic interest rates

Rudiger Frey and Daniel Sommer

Applied Mathematical Finance, 1996, vol. 3, issue 4, 295-317

Abstract: This paper deals with the valuation and the hedging of non-path-dependent European options on one or several underlying assets in a model of an international economy allowing for both, interest rate risk and exchange rate risk. Using martingale theory and, in particular, the change of numeraire technique we provide a unified and easily applicable approach to pricing and hedging exchange options on stocks, bonds, futures, interest rates and exchange rates. We also cover the pricing and hedging of compound exchange options.

Keywords: option pricing and hedging; interest rate risk; exchange rate risk; change of numeraire (search for similar items in EconPapers)
Date: 1996
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Citations: View citations in EconPapers (12)

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DOI: 10.1080/13504869600000014

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