Equilibrium Valuation of Foreign Exchange Claims

J. OF FINANCE

Posted: 12 Sep 1996

See all articles by Zhiwu Chen

Zhiwu Chen

University of Hong Kong, Faculty of Business Economics (HKU Business School); Asia Global Institute, University of Hong Kong

Gurdip Bakshi

Fox School of Business; Temple University - Fox School of Business and Management

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Abstract

This paper studies the equilibrium valuation of foreign exchange-contingent claims. The basic framework is the continuous-time counterpart of the classic Lucas (1982) two-country model, in which exchange rates, term structures of interest rates and, in particular, factor risk prices are all endogenously determined and empirically plausible. This endogenous nature guarantees the internal consistency of these price processes with a general equilibrium. In addition to the domestic and foreign nominal interest rates, closed-form valuation formulas are presented for exchange rate options and exchange rate futures options. Common to these formulas is that stochastic volatility and stochastic interest rates are admitted. Hedge ratios and other comparative statistics are provided analytically. It is shown that most existing currency option models are included as special cases.

JEL Classification: G13

Suggested Citation

Chen, Zhiwu and Bakshi, Gurdip S. and Bakshi, Gurdip S., Equilibrium Valuation of Foreign Exchange Claims. J. OF FINANCE, Available at SSRN: https://ssrn.com/abstract=7726

Zhiwu Chen

University of Hong Kong, Faculty of Business Economics (HKU Business School) ( email )

Pokfulam Road
Hong Kong
Hong Kong

Asia Global Institute, University of Hong Kong ( email )

Room 328-348, Main Building
The University of Hong Kong
Pokfulam
Hong Kong

Gurdip S. Bakshi (Contact Author)

Fox School of Business ( email )

Department of Finance
Philadelphia, PA 19022
United States
215-204-6117 (Phone)
tuk40718@temple.edu (Fax)

HOME PAGE: http://https://sites.google.com/view/gurdipbakshi1

Temple University - Fox School of Business and Management ( email )

Philadelphia, PA 19122
United States

HOME PAGE: http://https://sites.google.com/view/gurdipbakshi1

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