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Foreign currency option values

1983; Elsevier BV; Volume: 2; Issue: 3 Linguagem: Inglês

10.1016/s0261-5606(83)80001-1

1873-0639

Mark B. Garman, Steven W. Kohlhagen,

Monetary Policy and Economic Impact

Foreign exchange options are a recent market innovation. The standard Black-Scholes option-pricing model does not apply well to foreign exchange options, since multiple interest rates are involved in ways differing from the Black-Scholes assumptions. The present paper develops alternative assumptions leading to valuation formulas for foreign exchange options. These valuation formulas have strong connections with the commodity-pricing model of Black (1976) when forward prices are given, and with the proportional-dividend model of Samuelson and Merton (1969) when spot prices are given.