Realignment Risk and Currency Option Pricing in Target Zones / Bernard Dumas, L. Peter Jennergren, Bertil Naslund.

Format:

Book

Author/Creator:

Dumas, Bernard.

Contributor:

National Bureau of Economic Research.

Jennergren, L. Peter.

Naslund, Bertil.

Series:

Working Paper Series (National Bureau of Economic Research) no. w4458.

NBER working paper series no. w4458

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1993.

Summary:

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.

Notes:

Print version record

September 1993.