Quantitative Analysis.
Trading Platform.
Python for Excel.
Author.

Printable PDF file
I.Basic math.
II.Pricing and Hedging.
1.Basics of derivative pricing I.
2.Change of numeraire.
3.Basics of derivative pricing II.
4.Market model.
5.Currency Exchange.
A.Change of numeraire in the currency markets.
B.Invariant form of the SDE transformation formula.
C.Delta hedging in the currency markets.
D.Example: forward contract to purchase a foreign stock for domestic currency.
E.Example: forward currency exchange contract.
F.Example: quanto forward contract.
G.Example: quanto caplet.
H.Example: quanto fixed-for-floating swap.
6.Credit risk.
7.Incomplete markets.
III.Explicit techniques.
IV.Data Analysis.
V.Implementation tools.
VI.Basic Math II.
VII.Implementation tools II.
Bibliography.
Forum Notation Index Contents

Currency Exchange.

e will be considering USD and GBP markets equiped with the LIBOR prices and the spot riskless rates. There is a currency exchange market with quotes on spot exchange rate and forward exchange agreements. We already saw how to construct market models for each of the markets and price fixed income derivatives. The present chapter treats pricing of derivatives dependent on both markets.

We will derive SDE for exchange rate, show how to change probability measure from one market to another and apply these concepts to pricing of cross currency products.

The reference is [Mercurio].




A.Change of numeraire in the currency markets.
B.Invariant form of the SDE transformation formula.
C.Delta hedging in the currency markets.
D.Example: forward contract to purchase a foreign stock for domestic currency.
E.Example: forward currency exchange contract.
F.Example: quanto forward contract.
G.Example: quanto caplet.
H.Example: quanto fixed-for-floating swap.

Forum Notation Index Contents


















Copyright 2007.