EconPapers    
Economics at your fingertips  
 

Risk-minimizing pricing and hedging foreign currency options under regime-switching jump-diffusion models

Shaoyong Hu and Ailin Zhu

Communications in Statistics - Theory and Methods, 2017, vol. 46, issue 4, 1821-1842

Abstract: This article mainly investigates risk-minimizing European currency option pricing and hedging strategy when the spot foreign exchange rate is driven by a Markov-modulated jump-diffusion model. We suppose the domestic and foreign money market floating interest rates, the drift, and the volatility of the exchange rate dynamics all depend on the state of the economy, which is modeled by a continuous-time hidden Markov chain. The model considered in this article will provide market practitioners with flexibility in characterizing the dynamics of the spot foreign exchange rate. Using the minimal martingale measure, we obtain a system of coupled partial-differential-integral equations satisfied by the currency option price and find the corresponding hedging strategies and the residual risk. According to simulation of currency option prices in the special case of double exponential jump-diffusion regime-switching model, we further discuss and show the effects of the parameters on the prices.

Date: 2017
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://hdl.handle.net/10.1080/03610926.2015.1030420 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:lstaxx:v:46:y:2017:i:4:p:1821-1842

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/lsta20

DOI: 10.1080/03610926.2015.1030420

Access Statistics for this article

Communications in Statistics - Theory and Methods is currently edited by Debbie Iscoe

More articles in Communications in Statistics - Theory and Methods from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().

 
Page updated 2025-03-20
Handle: RePEc:taf:lstaxx:v:46:y:2017:i:4:p:1821-1842