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| Author: | Dumas, B. Jennergren, L. Naslund, B. |
| Title: | Realignment risk and currency option pricing in target zones |
| Journal: | European Economic Review
1995 : OCT, VOL. 39:8, p. 1523-1544 |
| Index terms: | RISK CURRENCY OPTIONS EXCHANGE RATES |
| Language: | eng |
| Abstract: | This paper extends the Krugman target zone model by including a realignment mechanism. Various properties of that realignment mechanism are discussed. The movement of the exchange rate is governed both by a Wiener process on fundamental and by a Piosson jump process with endogenous realignment size. The realignment mechanism is such that (except in cases where a speculative attack occurs) no jump in fundamental is needed to accompany the jump in the exchange rate. |
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