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Path‐dependent currency options with mean reversion
Author(s) -
Wong Hoi Ying,
Lau Ka Yung
Publication year - 2008
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.20306
Subject(s) - mean reversion , laplace transform , currency , path dependent , log normal distribution , path (computing) , black–scholes model , mathematics , econometrics , economics , computer science , mathematical analysis , statistics , volatility (finance) , monetary economics , programming language
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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