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| Author: | Doffou, A. Hilliard, J. E. |
| Title: | Pricing Currency Options Under Stochastic Interest Rates and Jump-Diffusion Processes |
| Journal: | Journal of Financial Research
2001 : WINTER, VOL. 24:4, p. 565-586 |
| Index terms: | PRICING PRICES PRICE POLICY INTEREST RATES DIFFUSION |
| Language: | eng |
| Abstract: | The authors investigate the effects of stochastic interest rates and jumps in the spot exchange rate on the pricing of currency futures, forwards, and futures options. The proposed model extends Bates's model by allowing both the domestic and foreign interest rates to move around randomly, in a generalized Vasicek term-structure framework. Numerical examples show that the model prices of European currency futures options are similar to those given by Bates's and Black's models in the absence of jumps and when the volatilities of the domestic and foreign interest rates and futures price are negligible. Changes in these volatilities affect the futures options prices. |
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