Pricing foreign currency options under stochastic interest rates

Kaushik I. Amin and Robert Jarrow ()
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Kaushik I. Amin: School of Business Administration, The University of Michigan, Ann Arbor, MI 48109-1234, USA

Chapter 14 in Financial Derivatives Pricing:Selected Works of Robert Jarrow, 2008, pp 307-326 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractIn this paper, we build a general framework to price contingent claims on foreign currencies using the Heath et al. (1987) model of the term structure. Closed form solutions are obtained for European options on currencies and currency futures assuming that the volatility functions determining the term structure are deterministic. As such, this paper provides an example of a bond price process (for both the domestic and foreign economies) consistent with Grabbe's (1983) formulation of the same problem.

Keywords: Derivatives; Options; Hedging; HJM; Black–Scholes; Forwards; Futures; Martingale Measure; Calls; Puts; Market Manipulation; Margin Requirements (search for similar items in EconPapers)
Date: 2008
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Journal Article: Pricing foreign currency options under stochastic interest rates (1991)
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