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We derived similar to Bo et al. (2010) results but in the case when thedynamics of the FX rate is driven by a general Merton jump-diffusion process.The main results of our paper are as follows: 1) formulas for the Esschertransform parameters which ensure that the martingale condition for thediscounted foreign exchange rate is a martingale for a general Mertonjump--diffusion process are derived; using the values of these parameters weproceeded to a risk-neural measure and provide new formulas for thedistribution of jumps, the mean jump size, and the Poisson process intensitywith respect to the measure; pricing formulas for European call foreignexchange options have been given as well; 2) obtained formulas are applied tothe case of the exponential processes; 3) numerical simulations of Europeancall foreign exchange option prices for different parameters are also provided;4) codes for Matlab functions used in numerical simulations of option pricesare given.

Currency Derivatives Pricing for Markov-modulated Merton Jump-diffusion Spot Forex Rate