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Asian Exchange Rate Options under Stochastic Interest Rates: Pricing as a Sum of Delayed Payment Options

  • Nielsen, J.A.
  • Sandmann, K.

The aim of the paper is to develop pricing formulas for European type Asian options written on the exchange rate in a two currency economy. The exchange rate as well as the foreign and domestic zero coupon bond prices are assumed to follow geometric Brownian motions. As a special case of a discrete Asian option we analyse the delayed payment currency option and develop closed form pricing and hedging formulas. The main emphasis is devoted to the discretely sampled Asian option. It is shown how the value of this option can be approximated as the sum of Black-Scholes options. The formula is obtained under the application of results developed by Rogers and Shi (1995) and Jamshidian (1991). In addition bounds for the pricing error are determined. distribution of information. This criterion allows, not only,

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File URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonsfb/bonsfb431.pdf
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File URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonsfb/bonsfb431.ps
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Paper provided by University of Bonn, Germany in its series Discussion Paper Serie B with number 431.

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Length: 30 pages
Date of creation: Nov 1998
Date of revision:
Handle: RePEc:bon:bonsfb:431
Contact details of provider: Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
Fax: +49 228 73 6884
Web page: http://www.bgse.uni-bonn.de

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  1. 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.
  2. Alziary, Benedicte & Decamps, Jean-Paul & Koehl, Pierre-Francois, 1997. "A P.D.E. approach to Asian options: analytical and numerical evidence," Journal of Banking & Finance, Elsevier, vol. 21(5), pages 613-640, May.
  3. Vorst, Ton, 1992. "Prices and hedge ratios of average exchange rate options," International Review of Financial Analysis, Elsevier, vol. 1(3), pages 179-193.
  4. Turnbull, Stuart M. & Wakeman, Lee Macdonald, 1991. "A Quick Algorithm for Pricing European Average Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(03), pages 377-389, September.
  5. 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 637-54, May-June.
  6. Amin, Kaushik I. & Jarrow, Robert A., 1991. "Pricing foreign currency options under stochastic interest rates," Journal of International Money and Finance, Elsevier, vol. 10(3), pages 310-329, September.
  7. Kemna, A. G. Z. & Vorst, A. C. F., 1990. "A pricing method for options based on average asset values," Journal of Banking & Finance, Elsevier, vol. 14(1), pages 113-129, March.
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