Valuation and parities for exchange options

Valuation and parity formulas for both European-style and American-style exchange options are presented in a general financial model allowing for jumps, possibility of default and "bubbles" in asset prices. The formulas are given via expectations of auxiliary probabilities using the change-of-numeraire technique. Extensive discussion is provided regarding the way that folklore results such as Merton's no-early-exercise theorem and traditional parity relations have to be altered in this more versatile framework.Comment: 19 page

Exchange Rate Regime Choice

The choice of an adequate exchange rate regime proves to be a highly sensitive field within which the economic authorities present and confirm themselves. The advantages and disadvantages of fixed and flexible exchange rate regimes, which have been quite relativized from the conventional point of view, together with simultaneous, but not synchronised effects of structural and external factors, remain permanently questioned throughout a complex process of exchange rate regime decision making. The paper reflects the attempt of critical identification of the key exchange rate performances, with emphasis on continuous non-uniformity and (un)certainty of shelf life of a relevant choice.Exchange rate regimes, Structural determiners, External determiners

Put-call parities and the value of early exercise for put options on a performance index

Futures Markets;finance

An exact pricing formula for European call options on zero-coupon bonds in the run-up to a currency union

In this paper we analyze the dynamics of zero-coupon bond options in a situation in which two open economies plan to enter a currency union in the future. More precisely, we make use of recent theoretical work on the continuous-time dynamics of interest-rate differentials between the economies involved and derive a closed-form pricing formula for a European call option on zero-coupon bonds. In a Monte-Carlo simulation study we show that significant option-pricing errors can occur when the key features of interest-rate dynamics during the run-up to the currency union are ignored.Interest-rate dynamics; valuation of interest-rate options; currency union

Economic, Political, Institutional as well as Social Risks and Opportunities of EMU Enlargement

The inclusion on May 1st, 2004 of eight Central and Eastern European Countries (CEEC) into the European Union (EU), and subsequently into the European Monetary Union (EMU) some years later, will cause deep changes within the political, economic, and social settings of the Union as well as in those of the new member countries. This paper’s underlying idea is that the new EU members in Central and Eastern Europe should continue to pursue an economic strategy of real convergence to the economic levels of the "old" member countries as rapidly as possible by securing sustained growth, e.g. by increasing private savings and by reducing the current account deficit. This report will discuss the implications of a "catch-up" strategy and have a look at the economic, political, social and institutional consequences for EMU enlargement.

Common currency and economic integration in mercosur

Latin America has a long history of attempts to achieve regional integration, yetsuccess has been modest. This paper contends that this is essentially due not so much toprotectionist practices in the various countries, but to the lack of a common currency, or, atleast, of a tightly managed exchange rate band. We reviewed the optimum currency areacriteria that indicate it is prudent to increase economic integration before attempting toestablish exchange rates coordination. Yet, we show that in the Mercosul there are already theminimal requirements to work on this direction. Diminishing exchange rate instability couldencourage trade and investment flows across Latin American economies. We also performed asimplified exercise to understand how feasible would be the efforts to achieve exchange rateparity stability in the two larger economies in the region (Brazil and Argentina) and stepforward toward adopting a common currency.

Assessing Central Bank credibility during the ERM crises: comparing option and spot market-based forecasts

Financial markets embed expectations of central bank policy into asset prices. This paper compares two approaches that extract a probability density of market beliefs. The first is a simulatedmoments estimator for option volatilities described in Mizrach (2002); the second is a new approach developed by Haas, Mittnik and Paolella (2004a) for fat-tailed conditionally heteroskedastic time series. In an application to the 1992-93 European Exchange Rate Mechanism crises, that both the options and the underlying exchange rates provide useful information for policy makers. JEL Klassifikation: G12, G14, F31

Government intervention in the foreign exchange market

This article offers a survey of the literature on foreign exchange intervention, including sections on the theoretical channels through which intervention might affect exchange rates and a summary of the empirical findings. The survey emphasizes that intervention is intended to provide monetary authorities with an means of influencing their exchange rates independent from monetary policy, and tends to evaluate theoretical channels and empirical results from this perspective.Foreign exchange administration