A non random walk theory of exchange rate dynamics with applications to option pricing |
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Authors: | Michael Tow Cheung David yeung |
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Affiliation: | School of Economics , University of Hong Kong , Hong Kong |
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Abstract: | A two dimensional stochastic process is developed to model exchange rate dynamics. We incorporate the non random walk influence of pur–chasing power parity, to synthesise the theories of international trade and foreign currency options. Our results, which include a closed form expression for the transition density function of the exchange rate and an exact formula to price currency options, offer a theoretical framework for further study of foreign exchange markets |
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