Pricing and Hedging International Equity Derivatives
Posted: 1 Jun 2001
Derivatives traded in the OTC markets may sometimes involve both asset price risk and exchange rate risk. This article provides an unified treatment of the pricing and hedging of path independent international equity derivatives. After modeling the international economy, we derive a partial differential equation that the pricing formula of any path independent derivative asset exposed to both equity risk and exchange rate risk has to satisfy. We use this result to derive pricing results for a variety of instuments. In addition, we derive and discuss the replication strategies that can be used to hedge these contracts.
JEL Classification: G13
Suggested Citation: Suggested Citation