Pricing American options on foreign currency with stochastic volatility, jumps, and stochastic interest rates

Jia-Hau Guo, Mao Wei Hung*

*Corresponding author for this work

Research output: Contribution to journalArticle

6 Scopus citations

Abstract

By applying the Heath-Jarrow-Morton (HJM) framework, an analytical approximation for pricing American options on foreign currency under stochastic volatility and double jump is derived. This approximation is also applied to other existing models for the purpose of comparison. There is evidence that such types of jumps can have a critical impact on early-exercise premiums that will be significant for deep out-of-the-money options with short maturities. Moreover, the importance of the term structure of interest rates to early-exercise premiums is demonstrated as is the sensitivity of these premiums to correlation-related parameters.

Original languageEnglish
Pages (from-to)867-891
Number of pages25
JournalJournal of Futures Markets
Volume27
Issue number9
DOIs
StatePublished - 1 Sep 2007

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