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Forward Exchange Price Determination in Continuous Time

Author

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  • Oldfield, George S.
  • Messina, Richard J.

Abstract

The work of Black and Scholes [2] and Merton [4] suggests that analysis of hedged positions in a continuous time random walk model yields powerful insights into the valuation of financial securities. The present paper extends this methodology in a straightforward fashion to foreign exchange transactions. By adopting the device of hedging in a secondary market for forward currency contracts against a long position in spot currency, a simple statement of boundary conditions for the forward position can be detailed. This allows a direct solution of the continuous time valuation problem that yields the interest rate parity theory.

Suggested Citation

  • Oldfield, George S. & Messina, Richard J., 1977. "Forward Exchange Price Determination in Continuous Time," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(3), pages 473-479, September.
    • Handle: RePEc:cup:jfinqa:v:12:y:1977:i:03:p:473-479_02
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    1. Fred Espen Benth & Jūratė Šaltytė Benth & Steen Koekebakker, 2008. "Stochastic Modeling of Electricity and Related Markets," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 6811, January.

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