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The Valuation Of Options On Foreign Exchange Rate In A Target Zone

Author

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  • GUANGLI XU

    (School of Mathematical Sciences, Nankai University, Tianjin 300071, P. R. China)

  • SHIYU SONG

    (School of Mathematical Sciences, Nankai University, Tianjin 300071, P. R. China)

  • YONGJIN WANG

    (#x2020;Business School and School of Mathematical Sciences, Nankai University, Tianjin 300071, P. R. China)

Abstract

This paper derives a simple model to analyze foreign exchange rate behavior under a target zone regime. From the real market data of exchange rate of US Dollar (USD) to Hong Kong Dollar (HKD) (USD/HKD), somewhat surprisingly, we find that some of the observations fall outside the stated range. Consequently, a so-called skew CIR model for this exchange rate which has a probability of exceeding the stated boundary is developed. A spectral expansion approach is used to analyze the model. The valuation of the barrier and the one-touch options for the derivative written on the exchange rate is studied in the end.

Suggested Citation

  • Guangli Xu & Shiyu Song & Yongjin Wang, 2016. "The Valuation Of Options On Foreign Exchange Rate In A Target Zone," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 19(03), pages 1-19, May.
    • Handle: RePEc:wsi:ijtafx:v:19:y:2016:i:03:n:s0219024916500205
    DOI: 10.1142/S0219024916500205
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    References listed on IDEAS

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    Cited by:

    1. Xiaoyang Zhuo & Olivier Menoukeu-Pamen, 2017. "Efficient Piecewise Trees For The Generalized Skew Vasicek Model With Discontinuous Drift," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 20(04), pages 1-34, June.
    2. Yizhou Bai & Yongjin Wang & Haoyan Zhang & Xiaoyang Zhuo, 2022. "Bayesian Estimation of the Skew Ornstein-Uhlenbeck Process," Computational Economics, Springer;Society for Computational Economics, vol. 60(2), pages 479-527, August.

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