Path‐dependent currency options with mean reversion

Hoi Ying Wong and Ka Yung Lau

Journal of Futures Markets, 2008, vol. 28, issue 3, 275-293

Abstract: This paper develops a path‐dependent currency option pricing framework in which the exchange rate follows a mean‐reverting lognormal process. Analytical solutions are derived for barrier options with a constant barrier, lookback options, and turbo warrants. As the analytical solutions are obtained using a Laplace transform, this study numerically shows that the solution implemented with a numerical Laplace inversion is efficient and accurate. The pricing behavior of path‐dependent options with mean reversion is contrasted with the Black‐Scholes model. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:275–293, 2008

Date: 2008
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