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Valuation And Optimal Exercise Time For The Banxico Put Option

Author

Listed:
  • BEGOÑNA FERNÁNDEZ FERNÁNDEZ

    (Facultad de Ciencias, Universidad Nacional Autónoma de México, Circuito Exterior, CV, México, 04510, D. F., México)

  • PATRICIA SAAVEDRA BARRERA

    (Departamento de Matematicas, Universidad Autónoma Metropolitana, Unidad Iztapalapa, Apartado Postal 55-534, México 09340, D. F., México)

Abstract

Since 1996, the Central Bank of México issues a put option in order to buy American Dollars as a way of increasing its international reserves. This is an exotic option that gives the right to the Mexican banks to sell this currency to the Central Bank at the price of the day before the date of exercise. The option has a maturity of one month and can be exercised on any day during this period, subject to an additional condition that depends on the average price of the Dollar during the previous 20 days. In this work we study the valuation and the optimal time of exercise of this option under the Binomial and the Black–Scholes Models. The optimal time of exercise is found for the Binomial model and a rule of exercise is proposed for the Black–Scholes Model. Numerical results are included to illustrate the performance of this rule of exercise.

Suggested Citation

  • Begoñna Fernández Fernández & Patricia Saavedra Barrera, 2003. "Valuation And Optimal Exercise Time For The Banxico Put Option," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 6(03), pages 257-275.
    • Handle: RePEc:wsi:ijtafx:v:06:y:2003:i:03:n:s021902490300189x
    DOI: 10.1142/S021902490300189X
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    References listed on IDEAS

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    1. Peter G Zhang, 1998. "Exotic Options:A Guide to Second Generation Options," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 3800, August.
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