Working Paper: NBER ID: w4522
Authors: Bernard Dumas; L. Peter Jennergren; Bertil Nslund
Abstract: This paper develops a model for valuing options on a currency which is maintained within a band. The starting point of our model is the well known Krugman model for exchange-rate behavior within a target zone. Results from model runs provide insight into evidence reported by other authors of mispricing of currency options by extensions of the Black-Scholes model.
Keywords: currency options; target zones; exchange rate; Black-Scholes model; Krugman model
JEL Codes: G13; F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exchange rate behavior (influenced by target zones) (F31) | valuation of currency options (F31) |
| target zones (R32) | exchange rate behavior (F31) |
| mispricing of currency options (F31) | differences in target zones influence exchange rate distributions (F31) |