Advanced Search
MyIDEAS: Login to save this paper or follow this series

Realignment Risk and Currency Option Pricing in Target Zones

Contents:

Author Info

  • Bernard Dumas
  • L. Peter Jennergren
  • Bertil Naslund

Abstract

This paper extends the Krugman target zone model by including a realignment mechanism. Various properties of that realignment mechanism are discussed. The movement of the exchange rate is governed both by a Wiener process on fundamental and by a Poisson jump process with endogenous realignment size. The realignment mechanism is such that (except in cases where a speculative attack occurs) no jump in fundamental is needed to accompany the jump in the exchange rate. A risk neutral valuation of currency options is constructed. Some properties of option values under realignment risk are illustrated by numerical results.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nber.org/papers/w4458.pdf
Download Restriction: no

Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4458.

as in new window
Length:
Date of creation: Sep 1993
Date of revision:
Publication status: published as European Economic Review, Vol. 39, (1995), pp. 1523-1566.
Handle: RePEc:nbr:nberwo:4458

Note: AP IFM
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Akgiray, Vedat & Booth, G Geoffrey, 1988. "Mixed Diffusion-Jump Process Modeling of Exchange Rate Movements," The Review of Economics and Statistics, MIT Press, vol. 70(4), pages 631-37, November.
  2. Flood, Robert P & Garber, Peter M, 1991. "The Linkage between Speculative Attack and Target Zone Models of Exchange Rates," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 106(4), pages 1367-72, November.
  3. Andrew K. Rose & Lars E.O. Svensson, 1991. "Expected and Predicted Realignments: The FF/DM Exchange Rate During the EMS," NBER Working Papers 3685, National Bureau of Economic Research, Inc.
  4. Edison, Hali J. & Fisher, Eric O'N, 1991. "A long-run view of the European monetary system," Journal of International Money and Finance, Elsevier, Elsevier, vol. 10(1), pages 53-70, March.
  5. Lars E.O. Svensson, 1990. "The Term Structure of Interest Rate Differentials in a Target Zone: Theory and Swedish Data," NBER Working Papers 3374, National Bureau of Economic Research, Inc.
  6. Dumas, B. & Jennergren, L.P. & Naslund, B., 1993. "Siegel's Paradox and Pricing of Currency Options," Weiss Center Working Papers, Wharton School - Weiss Center for International Financial Research 93-8, Wharton School - Weiss Center for International Financial Research.
  7. Krugman, Paul R, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 106(3), pages 669-82, August.
  8. Svensson, L.E.O., 1989. "Target Zones And Interest Rate Variability," Papers, Stockholm - International Economic Studies 457, Stockholm - International Economic Studies.
  9. Tucker, Alan L & Pond, Lallon, 1988. "The Probability Distribution of Foreign Exchange Price Changes: Tests of Candidate Processes," The Review of Economics and Statistics, MIT Press, vol. 70(4), pages 638-47, November.
  10. Bertola, G. & Svensson, L.E., 1990. "Stochastic Devaluation Risk and the Empirical Fit of Target Zone Models," Papers, Stockholm - International Economic Studies 481, Stockholm - International Economic Studies.
  11. Lindberg, H. & Svensson, L.E. & Soderlind, P., 1991. "Devaluation Expectations: the Swedish Krona 1982-1991," Papers, Stockholm - International Economic Studies 495, Stockholm - International Economic Studies.
  12. Robert P. Flood & Andrew K. Rose & Donald J. Mathieson, 1990. "An Empirical Exploration of Exchange Rate Target-Zones," NBER Working Papers 3543, National Bureau of Economic Research, Inc.
  13. Froot, Kenneth A. & Obstfeld, Maurice, 1991. "Exchange-rate dynamics under stochastic regime shifts : A unified approach," Journal of International Economics, Elsevier, vol. 31(3-4), pages 203-229, November.
  14. Bernard Dumas & L. Peter Jennergren & Bertil Naslund, 1993. "Currency Option Pricing in Credible Target Zones," NBER Working Papers 4522, National Bureau of Economic Research, Inc.
  15. Orlin J. Grabbe, . "The Pricing of Call and Put Options on Foreign Exchange," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 06-83, Wharton School Rodney L. White Center for Financial Research.
  16. Maurice Obstfeld & Alan C. Stockman, 1983. "Exchange-Rate Dynamics," NBER Working Papers 1230, National Bureau of Economic Research, Inc.
  17. Lindbecg, H. Soderlind, P., 1992. "Target Zone Models and the Intervention Policy; The Swedish Case," Papers, Stockholm - International Economic Studies 496, Stockholm - International Economic Studies.
  18. Lars E. O. Svensson, 1992. "An Interpretation of Recent Research on Exchange Rate Target Zones," Journal of Economic Perspectives, American Economic Association, vol. 6(4), pages 119-144, Fall.
  19. Orlin J. Grabbe, . "The Pricing of Call and Put Options on Foreign Exchange," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 6-83, Wharton School Rodney L. White Center for Financial Research.
  20. Lindberg, H. & Soderlind, P., 1991. "Testing the Basic Target Zone Model on Swedish Data," Papers, Stockholm - International Economic Studies 488, Stockholm - International Economic Studies.
  21. Paul Krugman & Marcus Miller, 1992. "Exchange Rate Targets and Currency Bands," NBER Books, National Bureau of Economic Research, Inc, number krug92-1, January.
  22. Merton, Robert C., 1976. "Option pricing when underlying stock returns are discontinuous," Journal of Financial Economics, Elsevier, Elsevier, vol. 3(1-2), pages 125-144.
  23. Garman, Mark B. & Kohlhagen, Steven W., 1983. "Foreign currency option values," Journal of International Money and Finance, Elsevier, Elsevier, vol. 2(3), pages 231-237, December.
  24. Geske, Robert, 1979. "The valuation of compound options," Journal of Financial Economics, Elsevier, Elsevier, vol. 7(1), pages 63-81, March.
  25. Delgado, Francisco & Dumas, Bernard, 1993. "Monetary contracting between central banks and the design of sustainable exchange-rate zones," Journal of International Economics, Elsevier, vol. 34(3-4), pages 201-224, May.
  26. Orlin Grabbe, J., 1983. "The pricing of call and put options on foreign exchange," Journal of International Money and Finance, Elsevier, Elsevier, vol. 2(3), pages 239-253, December.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Rahel Studer-Suter & Alexandra Janssen, 2014. "The Swiss franc's honeymoon," ECON - Working Papers, Department of Economics - University of Zurich 170, Department of Economics - University of Zurich.
  2. Bardhan, Indrajit, 1995. "Exchange rate shocks, currency options and the Siegel paradox," Journal of International Money and Finance, Elsevier, Elsevier, vol. 14(3), pages 441-458, June.
  3. Mundaca, Gabriela, 2003. "A Drift of the "Drift Adjustment Method"," Memorandum 16/2002, Oslo University, Department of Economics.
  4. Young-Kyu Moh, 2006. "Continuous-time model of uncovered interest parity with regulated jump-diffusion interest differential," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 38(21), pages 2523-2533.
  5. Mordecai Avriel & Jens Hilscher & Alon Raviv, 2012. "Inflation Derivatives Under Inflation Target Regimes," Working Papers, Brandeis University, Department of Economics and International Businesss School 43, Brandeis University, Department of Economics and International Businesss School.
  6. Naszódi, Anna, 2002. "A sávos árfolyamú deviza megközelítése opciók segítségével
    [The option-based description of the exchange rate in a target-zone system]
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(1), pages 25-44.
  7. Dumas, B. & Jennergren, L.P. & Naslund, B., 1993. "Currency Option Pricing in Credible Target Zones," Weiss Center Working Papers, Wharton School - Weiss Center for International Financial Research 93-7, Wharton School - Weiss Center for International Financial Research.
  8. Rangvid, Jesper & Sorensen, Carsten, 2001. "Determinants of the implied shadow exchange rates from a target zone," European Economic Review, Elsevier, vol. 45(9), pages 1665-1696, October.
  9. Lioui, Abraham, 1998. "Currency risk hedging: Futures vs. forward," Journal of Banking & Finance, Elsevier, vol. 22(1), pages 61-81, January.
  10. Naszódi, Anna, 2004. "A sáveltolás árfolyamhatásának vizsgálata opciós modell keretei között
    [Target-zone rearrangement and exchange-rate behaviour in an options-based model]
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 638-658.
  11. Christian Pierdzioch, 2000. "The Effectiveness of the FX Market Interventions of the Bundesbank During the Louvre Period: An Options-Based Analysis," Kiel Working Papers 971, Kiel Institute for the World Economy.
  12. Ekvall, Niklas & Peter Jennergren, L. & Naslund, Bertil, 1997. "Currency option pricing with mean reversion and uncovered interest parity: A revision of the Garman-Kohlhagen model," European Journal of Operational Research, Elsevier, Elsevier, vol. 100(1), pages 41-59, July.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:4458. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.