Valuation of Currency Options in Markets with a Crunch
Pricing of Securities
2018-01-26 v1
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.
Keywords
Cite
@article{arxiv.1801.08346,
title = {Valuation of Currency Options in Markets with a Crunch},
author = {Abdulnasser Hatemi-J and Youssef El-Khatib},
journal= {arXiv preprint arXiv:1801.08346},
year = {2018}
}