Pricing Currency Options in the Presence of a Target Zone

18 Pages Posted: 2 Jan 1999

See all articles by Mordecai Avriel

Mordecai Avriel

Technion-Israel Institute of Technology; Bank Hapoalim

Ptachia Bar-Shavit

Bank Hapoalim

Haim Reisman

Technion-Israel Institute of Technology - William Davidson Faculty of Industrial Engineering & Management

Date Written: November 1998

Abstract

The paper characterizes the class of all one dimensional diffusion exchange rate processes that lie strictly inside a target zone. This characterization is done in the risk-neutral probability, which is practically all that is needed for the purpose of option pricing. The basic version of the model is extended to a model for pricing options on a single currency which is included in a target zone-constrained currency basket. Another extension is the calibration of the model so that it is consistent with any given domestic term structure of interest rates.

JEL Classification: F31, E31, E52

Suggested Citation

Avriel, Mordecai and Bar-Shavit, Ptachia and Reisman, Haim, Pricing Currency Options in the Presence of a Target Zone (November 1998). Available at SSRN: https://ssrn.com/abstract=141980 or http://dx.doi.org/10.2139/ssrn.141980

Mordecai Avriel

Technion-Israel Institute of Technology ( email )

Technion City
Haifa 32000, Haifa 32000
Israel

Bank Hapoalim ( email )

Haifa
Israel

Ptachia Bar-Shavit

Bank Hapoalim

Haifa
Israel

Haim Reisman (Contact Author)

Technion-Israel Institute of Technology - William Davidson Faculty of Industrial Engineering & Management ( email )

Haifa 32000
Israel
+972-4-829-4442 (Phone)
+972-4-823-5194 (Fax)

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