The Pricing of Call and Put Options on Foreign Exchange

Orlin J. Grabbe

Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research

Abstract: This paper derives exact pricing equations for American and European puts and calls on foreign exchange and discusses hedging strategy. Because every call option on foreign currency is simultaneously a put option on the domestic currency, an equivalence relation exists that allows the immediate derivation of put equations from the corresponding call formulas. The call and put pricing formulas are unlike the Black-Scholes equations for stock options in that there are two relevant interest rates, interest rates are stochastic, and boundary constraints differ. In addition, both American call and put options have values larger than their European counterparts.

References: Add references at CitEc
Citations: View citations in EconPapers (82)

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

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:fth:pennfi:06-83

Access Statistics for this paper

More papers in Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research Contact information at EDIRC.
Bibliographic data for series maintained by Thomas Krichel ().