Equilibrium Valuation of Currency Options in a Small Open Economy

Melanie Cao ()

No 960, Working Papers from Queen's University, Department of Economics

Abstract: The log-normal Garman and Kohlhagen (1983) currency option model usually creates pricing biases when matched with the market prices. The observed price bias pattern is generally consistent with the mixed jump-diffusion distribution for the exchange rates. Various studies have provided evidence of jump risks in exchange rate movements. This paper argues that the jump risk in the exchange rates may be correlated with the market.

Keywords: CURRENCIES; RISK; EXCHANGE RATE; OPEN ECONOMY (search for similar items in EconPapers)
JEL-codes: F41 F31 (search for similar items in EconPapers)
Date: 1997

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Persistent link: http://EconPapers.repec.org/RePEc:qed:wpaper:960

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