Bounds and Prices of Currency Cross-Rate Options. San-Lin Chung National Taiwan University Co-authored with Yaw-Huei Wang National Central University. Motivation. Target: Option market’s information is believed to be more efficient
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National Taiwan University
Co-authored with Yaw-Huei Wang
National Central University
Option market’s information is believed to be more efficient
Our option pricing bounds are useful because
We found that:
= a European option to buy £1 for €K
= an option to exchange KS$/€ dollars for S$/£ dollars (under $ measure)
= S$/£ - max[min(S$/£, KS$/€), 0]
where K** is a constant satisfying that
is the cumulative distribution function.
Then the lower bound of the cross-rate option price in dollars is as follows: