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Use of Forward Interest Rates and Forward Exchange Rates for the Valuation of Currency-Interest Rate Derivatives
[Použití forwardových úrokových sazeb a forwardových měnových kurzů při oceňování měnově-úrokových OTC derivátů]

Author

Listed:
  • Jaroslav Brada

Abstract

The article describes the procedures by which you can appreciate the potential receivables and payables, whose size depends on interest rates (reference interest rates e.g. 1M USD LIBOR) or reference exchange rates. The article describes the procedure, which enables to estimate price of conditional flows of payments having the character of OTC currency options or interest rate options. The reader is shown procedures for estimating the forward interest rates and forward exchange rates and it is shown how to estimate the forward rate and forward exchange rates used in the valuation of OTC options - European and American (US) currency call and put options, Asian (average) interest rate option, and interest rate option - cap and floor. It is shown how one can make the measurement of a class of so-called interest rate forwards and currency forwards and interest rate futures and currency futures. The mentioned valuation model does not require the use of a binomial or Black-Scholes option pricing model, which greatly simplifies the use of the mentioned valuation procedures in this paper.

Suggested Citation

  • Jaroslav Brada, 2014. "Use of Forward Interest Rates and Forward Exchange Rates for the Valuation of Currency-Interest Rate Derivatives [Použití forwardových úrokových sazeb a forwardových měnových kurzů při oceňování mě," Český finanční a účetní časopis, Prague University of Economics and Business, vol. 2014(1), pages 6-18.
    • Handle: RePEc:prg:jnlcfu:v:2014:y:2014:i:1:id:377:p:6-18
    DOI: 10.18267/j.cfuc.377
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    References listed on IDEAS

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    1. Kaushik I. Amin & Robert A. Jarrow, 2008. "Pricing foreign currency options under stochastic interest rates," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 14, pages 307-326, World Scientific Publishing Co. Pte. Ltd..
    2. Hull, John & White, Alan, 1990. "Pricing Interest-Rate-Derivative Securities," The Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 573-592.
    3. Gupta, Anurag & Subrahmanyam, Marti G., 2005. "Pricing and hedging interest rate options: Evidence from cap-floor markets," Journal of Banking & Finance, Elsevier, vol. 29(3), pages 701-733, March.
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    Cited by:

    1. Hasan Dinçer & Serhat Yüksel & Fatih Pınarbaşı & Mehmet Ali Alhan, 2020. "Risky Financial Assets in Financial Integration and the Impacts of Derivatives on Banking Returns," World Scientific Book Chapters, in: Stéphane Goutte & Khaled Guesmi (ed.), Risk Factors and Contagion in Commodity Markets and Stocks Markets, chapter 6, pages 133-159, World Scientific Publishing Co. Pte. Ltd..

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    More about this item

    Keywords

    Interest rate option valuation; Currency option valuation; Exotic option; OTC derivatives; Bond valuation; Forward exchange rates; Oceňování úrokových opcí; Oceňování měnových opcí; Exotické opce; OTC deriváty; Forwardové měnové kurzy;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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