Abstract
This paper presents an analytic result for the price of a European call option on a foreign exchange currency rate. Market volatility is assumed correlated with the exchange rate and interest rates, domestic and foreign, are assumed to be stochastic. Integrals involving interest rates are derived, characteristic functions are produced, and, with evaluation, the nature of the integrals involved in Fourier inversion is examined. By comparison with FX market data, some of the effects of the nature of stochastic interest rates upon option prices are examined.
Original language | English |
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Pages (from-to) | 1256-1268 |
Number of pages | 13 |
Journal | Journal Statistical Planning and Inference |
Volume | 140 |
Issue number | 5 |
DOIs | |
Publication status | Published - 2009 |
Keywords
- foreign exchange options
- stochastic analysis