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Equilibrium Valuation of Foreign Exchange Claims

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  • Bakshi, Gurdip S
  • Chen, Zhiwu

Abstract

This article studies the equilibrium valuation of foreign exchange contingent claims. Within a continuous-time Lucas (1982) two-country model, exchange rates, interest rates, and, in particular, factor risk prices are all endogenously and jointly determined. This guarantees the internal consistency of these price processes with a general equilibrium. In the same model, closed-form valuation formulas are presented for currency options and currency futures options. Common to these formulas is that stochastic volatility and stochastic interest rates are admitted. Hedge ratios and other comparative statics are also provided analytically. It is shown that most existing currency option models are included as special cases. Copyright 1997 by American Finance Association.

Suggested Citation

  • Bakshi, Gurdip S & Chen, Zhiwu, 1997. "Equilibrium Valuation of Foreign Exchange Claims," Journal of Finance, American Finance Association, vol. 52(2), pages 799-826, June.
    • Handle: RePEc:bla:jfinan:v:52:y:1997:i:2:p:799-826
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    References listed on IDEAS

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    1. Bick, Avi, 1987. "On the Consistency of the Black-Scholes Model with a General Equilibrium Framework," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(3), pages 259-275, September.
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    More about this item

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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