Valuation of Currency Options in Markets with a Crunch

Abdulnasser Hatemi-J and Youssef El-Khatib

Papers from arXiv.org

Abstract: This work studies the valuation of currency options in markets suffering from a financial crisis. We consider a European option where the underlying asset is a foreign currency. We assume that the value of the underlying asset is a stochastic process that follows a modified Black-Scholes model with an augmented stochastic volatility. Under these settings, we provide a closed form solution for the option-pricing problem on foreign currency for the European call and put options. A mathematical proof is provided for the underlying solution. In addition, simulation results and an application are provided.

Date: 2018-01
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1801.08346

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