IDEAS home Printed from https://ideas.repec.org/a/mfj/journl/v11y2007i3-4p157-178.html
   My bibliography  Save this article

Timing Decisions in a Multinational Context: Implementing the Amin/Bodurtha Framework

Author

Listed:
  • Manfred Fruhwirth

    (Vienna University of Economics and Business Administration, Austria)

  • Paul Schneider

    (Vienna University of Economics and Business Administration, Austria)

  • Markus S. Schwaiger

    (Austrian Central Bank and Vienna University of Economics and Business Administration, Austria)

Abstract

The Amin/Bodurtha framework was developed for the valuation of American-style financial instruments driven by three sources of uncertainty— domestic interest rate risk, foreign interest rate risk and exchange rate risk. The model is not only appropriate for pricing a number of financial derivatives, but also, as we show, for valuing foreign investment projects in the presence of real options. In this paper we propose the most natural directly implementable specification within the Amin/Bodurtha framework that permits all combinations of up and down moves of these three risk factors without restricting volatility functions of the factors or correlations between them. By use of the depth-first algorithm, we can show that this specification is implementable at reasonable computation times

Suggested Citation

  • Manfred Fruhwirth & Paul Schneider & Markus S. Schwaiger, 2007. "Timing Decisions in a Multinational Context: Implementing the Amin/Bodurtha Framework," Multinational Finance Journal, Multinational Finance Journal, vol. 11(3-4), pages 157-178, September.
    • Handle: RePEc:mfj:journl:v:11:y:2007:i:3-4:p:157-178
    as

    Download full text from publisher

    File URL: http://www.mfsociety.org/modules/modDashboard/uploadFiles/journals/MJ~747~p16tr11fp6q7r1q351k880b10e14.pdf
    Download Restriction: no
    File URL: http://www.mfsociety.org/modules/modDashboard/uploadFiles/journals/googleScholar/768.html
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," The Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 113-147.
    2. Wi Saeng Kim & Esmeralda Lyn & Edward Zychowicz, 2003. "Is the Source of FDI Important to Emerging Market Economies? Evidence from Japanese and U.S. FDI," Multinational Finance Journal, Multinational Finance Journal, vol. 7(3-4), pages 107-130, September.
    3. Ait-Sahalia, Yacine, 1996. "Testing Continuous-Time Models of the Spot Interest Rate," The Review of Financial Studies, Society for Financial Studies, vol. 9(2), pages 385-426.
    4. Darby, Julia, et al, 1999. "The Impact of Exchange Rate Uncertainty on the Level of Investment," Economic Journal, Royal Economic Society, vol. 109(454), pages 55-67, March.
    5. Orlin Grabbe, J., 1983. "The pricing of call and put options on foreign exchange," Journal of International Money and Finance, Elsevier, vol. 2(3), pages 239-253, December.
    6. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    7. William R. Emmons & Frank A. Schmid, 2004. "Monetary policy actions and the incentive to invest," Working Papers 2004-018, Federal Reserve Bank of St. Louis.
    8. Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1992. "Waiting to Invest: Investment and Uncertainty," The Journal of Business, University of Chicago Press, vol. 65(1), pages 1-29, January.
    9. Hilliard, Jimmy E. & Madura, Jeff & Tucker, Alan L., 1991. "Currency Option Pricing with Stochastic Domestic and Foreign Interest Rates," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(2), pages 139-151, June.
    10. 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, vol. 100(1), pages 41-59, July.
    11. John C. Cox & Jonathan E. Ingersoll Jr. & Stephen A. Ross, 2005. "A Theory Of The Term Structure Of Interest Rates," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 5, pages 129-164, World Scientific Publishing Co. Pte. Ltd..
    12. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(4), pages 707-727.
    13. Dothan, Michael U., 1990. "Prices in Financial Markets," OUP Catalogue, Oxford University Press, number 9780195053128.
    14. Alan M. Rugman & Jing Li (ed.), 2005. "Real Options and International Investment," Books, Edward Elgar Publishing, number 2613.
    15. Amin, Kaushik I. & Morton, Andrew J., 1994. "Implied volatility functions in arbitrage-free term structure models," Journal of Financial Economics, Elsevier, vol. 35(2), pages 141-180, April.
    16. Amin, Kaushik I & Bodurtha, James N, Jr, 1995. "Discrete-Time Valuation of American Options with Stochastic Interest Rates," The Review of Financial Studies, Society for Financial Studies, vol. 8(1), pages 193-234.
    17. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    18. Jang-Ting Guo & Rong-Chang Wu, 1998. "Financial Liberalization and the Exchange-Rate Exposure of the Taiwanese Firms: A Nonparametric Analysis of Taiwan," Multinational Finance Journal, Multinational Finance Journal, vol. 2(1), pages 37-61, March.
    19. Garman, Mark B. & Kohlhagen, Steven W., 1983. "Foreign currency option values," Journal of International Money and Finance, Elsevier, vol. 2(3), pages 231-237, December.
    20. Kaushik I. Amin & Robert A. Jarrow, 2008. "Pricing foreign currency options under stochastic interest rates," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 14, pages 307-326, World Scientific Publishing Co. Pte. Ltd..
    21. John H. Dunning & Rajneesh Narula, 2004. "Multinationals and Industrial Competitiveness," Books, Edward Elgar Publishing, number 3343.
    22. Orlin J. Grabbe, "undated". "The Pricing of Call and Put Options on Foreign Exchange," Rodney L. White Center for Financial Research Working Papers 06-83, Wharton School Rodney L. White Center for Financial Research.
    23. Ephraim Clark & Radu Tunaru, 2001. "Emerging Markets: Investing with Political Risk," Multinational Finance Journal, Multinational Finance Journal, vol. 5(3), pages 155-173, September.
    24. Andrew B. Bernard & J. Bradford Jensen & Peter K. Schott, 2009. "Importers, Exporters and Multinationals: A Portrait of Firms in the U.S. that Trade Goods," NBER Chapters, in: Producer Dynamics: New Evidence from Micro Data, pages 513-552, National Bureau of Economic Research, Inc.
    25. Davide Castellani & Antonello Zanfei, 2006. "Multinational Firms, Innovation and Productivity," Books, Edward Elgar Publishing, number 3709.
    26. David Heath & Robert Jarrow & Andrew Morton, 2008. "Bond Pricing And The Term Structure Of Interest Rates: A New Methodology For Contingent Claims Valuation," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 13, pages 277-305, World Scientific Publishing Co. Pte. Ltd..
    27. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-638, June.
    28. San-Lin Chung & Hsiao-Fen Yang, 2005. "Pricing Quanto Equity Swaps in a Stochastic Interest Rate Economy," Applied Mathematical Finance, Taylor & Francis Journals, vol. 12(2), pages 121-146.
    29. Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 145-166.
    30. Chang, Chuang-Chang, 2001. "Efficient procedures for the valuation and hedging of American currency options with stochastic interest rates," Journal of Multinational Financial Management, Elsevier, vol. 11(3), pages 241-268, July.
    31. Broadie, Mark & Glasserman, Paul, 1997. "Pricing American-style securities using simulation," Journal of Economic Dynamics and Control, Elsevier, vol. 21(8-9), pages 1323-1352, June.
    32. Orlin J. Grabbe, "undated". "The Pricing of Call and Put Options on Foreign Exchange," Rodney L. White Center for Financial Research Working Papers 6-83, Wharton School Rodney L. White Center for Financial Research.
    33. McDonald, Robert L & Siegel, Daniel R, 1985. "Investment and the Valuation of Firms When There Is an Option to Shut Down," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 331-349, June.
    34. Kaushik I. Amin & Robert A. Jarrow, 1992. "Pricing Options On Risky Assets In A Stochastic Interest Rate Economy1," Mathematical Finance, Wiley Blackwell, vol. 2(4), pages 217-237, October.
    35. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," University of California at Los Angeles, Anderson Graduate School of Management qt43n1k4jb, Anderson Graduate School of Management, UCLA.
    36. Christopher S. Jones, 2003. "Nonlinear Mean Reversion in the Short-Term Interest Rate," The Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 793-843, July.
    37. Ho, Thomas S Y & Lee, Sang-bin, 1986. "Term Structure Movements and Pricing Interest Rate Contingent Claims," Journal of Finance, American Finance Association, vol. 41(5), pages 1011-1029, 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


    Cited by:

    1. Stephen Matteo Miller, 2012. "Booms and Busts as Exchange Options," Multinational Finance Journal, Multinational Finance Journal, vol. 16(3-4), pages 189-223, September.
    2. Vishaal Baulkaran & Nathaniel C. Lupton, 2020. "U.S. FDI and Shareholder Rights Protection in Developed and Developing Economies," Multinational Finance Journal, Multinational Finance Journal, vol. 24(3-4), pages 155-182, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    2. Mark Broadie & Jerome B. Detemple, 2004. "ANNIVERSARY ARTICLE: Option Pricing: Valuation Models and Applications," Management Science, INFORMS, vol. 50(9), pages 1145-1177, September.
    3. Sanjay K. Nawalkha & Xiaoyang Zhuo, 2022. "A Theory of Equivalent Expectation Measures for Contingent Claim Returns," Journal of Finance, American Finance Association, vol. 77(5), pages 2853-2906, October.
    4. Duffie, Darrell, 2003. "Intertemporal asset pricing theory," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 11, pages 639-742, Elsevier.
    5. Chang, Chuang-Chang, 2001. "Efficient procedures for the valuation and hedging of American currency options with stochastic interest rates," Journal of Multinational Financial Management, Elsevier, vol. 11(3), pages 241-268, July.
    6. Suresh M. Sundaresan, 2000. "Continuous‐Time Methods in Finance: A Review and an Assessment," Journal of Finance, American Finance Association, vol. 55(4), pages 1569-1622, August.
    7. Akihiko Takahashi & Kohta Takehara, 2009. "Asymptotic Expansion Approaches in Finance: Applications to Currency Options," CARF F-Series CARF-F-165, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    8. Akihiko Takahashi & Kohta Takehara, 2009. "Asymptotic Expansion Approaches in Finance: Applications to Currency Options," CIRJE F-Series CIRJE-F-654, CIRJE, Faculty of Economics, University of Tokyo.
    9. Muthuraman, Kumar, 2008. "A moving boundary approach to American option pricing," Journal of Economic Dynamics and Control, Elsevier, vol. 32(11), pages 3520-3537, November.
    10. Nawalkha, Sanjay K. & Chambers, Donald R., 1995. "A note on currency option pricing," International Review of Financial Analysis, Elsevier, vol. 4(1), pages 81-84.
    11. 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, vol. 100(1), pages 41-59, July.
    12. Akihiko Takahashi & Kohta Takehara, 2007. "An Asymptotic Expansion Approach to Currency Options with a Market Model of Interest Rates under Stochastic Volatility Processes of Spot Exchange Rates," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 14(1), pages 69-121, March.
    13. Akihiko Takahashi & Kohta Takehara, 2007. "An Asymptotic Expansion Approach to Currency Options with a Market Model of Interest Rates under Stochastic Volatility Processes of Spot Exchange Rates," CIRJE F-Series CIRJE-F-474, CIRJE, Faculty of Economics, University of Tokyo.
    14. Tucker, A. L. & Wei, J. Z., 1998. "Valuation of LIBOR-Contingent FX options," Journal of International Money and Finance, Elsevier, vol. 17(2), pages 249-277, April.
    15. Akihiko Takahashi & Kohta Takehara, 2007. "An Asymptotic Expansion Approach to Currency Options with a Market Model of Interest Rates under Stochastic Volatility Processes of Spot Exchange Rates (Revised in August 2007 and January 2009; subseq," CARF F-Series CARF-F-092, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    16. Gourieroux, C. & Monfort, A. & Sufana, R., 2010. "International money and stock market contingent claims," Journal of International Money and Finance, Elsevier, vol. 29(8), pages 1727-1751, December.
    17. Marcos Escobar & Christoph Gschnaidtner, 2018. "A multivariate stochastic volatility model with applications in the foreign exchange market," Review of Derivatives Research, Springer, vol. 21(1), pages 1-43, April.
    18. Masci, Martín Ezequiel, 2012. "Irreversibilidad e incertidumbre de las decisiones financieras en i&d [Irreversibility and uncertainty of the financial investments on r&d]," MPRA Paper 40970, University Library of Munich, Germany.
    19. David S. Bates, 1995. "Testing Option Pricing Models," NBER Working Papers 5129, National Bureau of Economic Research, Inc.
    20. Detemple, Jerome & Kitapbayev, Yerkin, 2022. "Optimal technology adoption for power generation," Energy Economics, Elsevier, vol. 111(C).

    More about this item

    Keywords

    American-style derivatives; multinational timing decisions; depth-first algorithm;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • F30 - International Economics - - International Finance - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:mfj:journl:v:11:y:2007:i:3-4:p:157-178. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Theodossiou Panayiotis (email available below). General contact details of provider: https://edirc.repec.org/data/mfsssea.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.