Realignment Risk and Currency Option Pricing in Target Zones PDF Download

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Realignment Risk and Currency Option Pricing in Target Zones

Realignment Risk and Currency Option Pricing in Target Zones PDF Author: Bernard Dumas
Publisher:
ISBN:
Category : Currency convertibility
Languages : en
Pages : 56

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Book Description
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.