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Path-dependent currency options with mean reversion

✍ Scribed by Hoi Ying Wong; Ka Yung Lau

Publisher
John Wiley and Sons
Year
2008
Tongue
English
Weight
330 KB
Volume
28
Category
Article
ISSN
0270-7314

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✦ Synopsis

Abstract

This paper develops a path‐dependent currency option pricing framework in which the exchange rate follows a mean‐reverting lognormal process. Analytical solutions are derived for barrier options with a constant barrier, lookback options, and turbo warrants. As the analytical solutions are obtained using a Laplace transform, this study numerically shows that the solution implemented with a numerical Laplace inversion is efficient and accurate. The pricing behavior of path‐dependent options with mean reversion is contrasted with the Black‐Scholes model. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:275–293, 2008

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