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Equilibrium pricing of currency options under a discontinuous model in a two-country economy

Author

Listed:
  • Xing Yu

    (School of Finance, Nanjing Audit University, Nanjing 211815, PR China)

  • Yang Xiaoping

    (School of Science, Nanjing University of Science and Technology, Nanjing 210094, PR China)

Abstract

(Bakshi, G., and Z. Chen. 1997. “Equilibrium Valuation of Foreign Exchange Claims.” Journal of Finance 52: 799–826) studied equilibrium valuation for foreign exchange claims in the setting of the two-country Lucas-type economy. In Bakshi and Chen (1997), they assumed the money supplies follow two-factor stochastic volatility processes. Based on their model, we add two independent Poisson-type jumps, respectively into the process of money supply in each country. By solving a partial integro-differential equation (PIDE) for currency options, we get closed-form solutions of call currency option prices. Our model is a generalization of Bakshi and Chen (1997), and can contain a class of stochastic-volatility jump-diffusion (SVJD) models as special cases.

Suggested Citation

  • Xing Yu & Yang Xiaoping, 2016. "Equilibrium pricing of currency options under a discontinuous model in a two-country economy," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 20(2), pages 185-198, April.
    • Handle: RePEc:bpj:sndecm:v:20:y:2016:i:2:p:185-198:n:5
    DOI: 10.1515/snde-2015-0001
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    References listed on IDEAS

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