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Pricing currency derivatives with Markov-modulated Lévy dynamics

Section: Articles
Title: Pricing currency derivatives with Markov-modulated Lévy dynamics / Anatoliy Swishchuk, Maksym Tertychnyi, Robert ElliottAuthor: Swishchuk, Anatoliy
Notes: Sumario: Using a Lévy process we generalize formulas in Bo et al. (2010) for the Esscher transform parameters for the log-normal distribution which ensure that the martingale condition holds for the discounted foreign exchange rate. Using these values of the parameters we find a risk-neural measure and provide new formulas for the distribution of jumps, the mean jump size, and the Poisson process intensity with respect to this measure. The formulas for a European call foreign exchange option are also derived. We apply these formulas to the case of the log-double exponential distribution of jumps. We provide numerical simulations for the European call foreign exchange option prices with different parameters.Related records: En: Insurance : mathematics and economics. - Oxford : Elsevier, 1990- = ISSN 0167-6687. - 07/07/2014 Volumen 57 Número 1 - julio 2014 Other categories: 6
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