Currency Option Pricing in Credible Target Zones

Bernard Dumas, L. Peter Jennergren, Bertil Naslund

NBER Working Paper No. 4522
Issued in November 1993
NBER Program(s):   AP   IFM

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.

(257 K)

Published: Review of Futures Markets, Vol. 12, No. 2, pp. 323-346. (April 1992)

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