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A systematic approach to pricing and hedging international derivatives with interest rate risk: analysis of international derivatives under stochastic interest rates

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  • Rudiger Frey
  • Daniel Sommer
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    Abstract

    This paper deals with the valuation and the hedging of non-path-dependent European options on one or several underlying assets in a model of an international economy allowing for both, interest rate risk and exchange rate risk. Using martingale theory and, in particular, the change of numeraire technique we provide a unified and easily applicable approach to pricing and hedging exchange options on stocks, bonds, futures, interest rates and exchange rates. We also cover the pricing and hedging of compound exchange options.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/13504869600000014
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Mathematical Finance.

    Volume (Year): 3 (1996)
    Issue (Month): 4 ()
    Pages: 295-317

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    Handle: RePEc:taf:apmtfi:v:3:y:1996:i:4:p:295-317

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    Web page: http://www.tandfonline.com/RAMF20

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    Related research

    Keywords: option pricing and hedging; interest rate risk; exchange rate risk; change of numeraire;

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    Cited by:
    1. Erik Schlögl, 1999. "A Multicurrency Extension of the Lognormal Interest Rate Market Models," Research Paper Series 20, Quantitative Finance Research Centre, University of Technology, Sydney.
    2. A. Dudenhausen & Erik Schlögl & L. Schlögl, 1999. "Robustness of Gaussian Hedges and the Hedging of Fixed Income Derivatives," Research Paper Series 19, Quantitative Finance Research Centre, University of Technology, Sydney.
    3. Lech A. Grzelak & Cornelis W. Oosterlee, 2012. "On Cross-Currency Models with Stochastic Volatility and Correlated Interest Rates," Applied Mathematical Finance, Taylor & Francis Journals, vol. 19(1), pages 1-35, February.
    4. A. Pelsser, 2003. "Mathematical foundation of convexity correction," Quantitative Finance, Taylor & Francis Journals, vol. 3(1), pages 59-65.

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