THE VALUATION OF OPTIONS ON FOREIGN EXCHANGE RATE IN A TARGET ZONE

Guangli Xu (), Shiyu Song and Yongjin Wang ()
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Guangli Xu: School of Mathematical Sciences, Nankai University, Tianjin 300071, P. R. China
Shiyu Song: School of Mathematical Sciences, Nankai University, Tianjin 300071, P. R. China
Yongjin Wang: #x2020;Business School and School of Mathematical Sciences, Nankai University, Tianjin 300071, P. R. China

International Journal of Theoretical and Applied Finance (IJTAF), 2016, vol. 19, issue 03, 1-19

Abstract: This paper derives a simple model to analyze foreign exchange rate behavior under a target zone regime. From the real market data of exchange rate of US Dollar (USD) to Hong Kong Dollar (HKD) (USD/HKD), somewhat surprisingly, we find that some of the observations fall outside the stated range. Consequently, a so-called skew CIR model for this exchange rate which has a probability of exceeding the stated boundary is developed. A spectral expansion approach is used to analyze the model. The valuation of the barrier and the one-touch options for the derivative written on the exchange rate is studied in the end.

Keywords: Skew CIR; foreign exchange rate; target zone; transition density; first hitting time; spectral expansion; barrier and one-touch options (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (2)

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DOI: 10.1142/S0219024916500205

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