Currency Option Pricing in Credible Target Zones
Bernard Dumas, L. Peter Jennergren, Bertil Naslund
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.
Published: Review of Futures Markets, Vol. 12, No. 2, pp. 323-346. (April 1992)