Currency Derivatives: Pricing Theory, Exotic Options, And Hedging Applications

A groundbreaking collection on currency derivatives, including pricing theory and hedging applications.

"David DeRosa has assembled an outstanding collection of works on foreign exchange derivatives. It surely will become required reading for both students and option traders."-Mark B. Garman President, Financial Engineering Associates, Inc. Emeritus Professor, University of California, Berkeley.

"A comprehensive selection of the major references in currency option pricing."-Nassim Taleb. Senior trading advisor, Paribas Author, Dynamic Hedging: Managing Vanilla and Exotic Options.

"A useful compilation of articles on currency derivatives, going from the essential to the esoteric."-Philippe Jorion Professor of Finance, University of California, Irvine Author, Value at Risk: The New Benchmark for Controlling Market Risk.

Every investment practitioner knows of the enormous impact that the Black-Scholes option pricing model has had on investment and derivatives markets. The success of the theory in understanding options on equity, equity index, and fixed- income markets is common knowledge. Yet, comparatively few professionals are aware that the theory's greatest successes may have been in the derivatives market for foreign exchange. Perhaps this is not surprising because the foreign exchange market is a professional trading arena that is closed virtually to all but institutional participants. Nevertheless, the world's currency markets have proven to be an almost ideal testing and development ground for new derivative instruments.

This book contains many of the most important scientific papers that collectively constitute the core of modern currency derivatives theory. What is remarkable is that each and every one of these papers has found its place in the real world of currency derivatives trading. As such, the contributing authors to this volume can properly claim to have been codevelopers of this new derivatives market, having worked in de facto partnership with the professional traders in the dealing rooms of London, New York, Tokyo, and Singapore.

The articles in this book span the entire currency derivatives field: forward and futures contracts, vanilla currency puts and calls, models for American exercise currency options, options on currencies with bounded exchange rate regimes, currency futures options, the term and strike structure of implied volatility, jump and stochastic volatility option pricing models, barrier options, Asian options, and various sorts of quanto options.

DAVID F. DeROSA is President of DeRosa Research and Trading, Inc. and Adjunct Professor of Finance at Yale School of Management. He is a contributing editor for global investment strategy for the Internet newsletter TheStreet.com. DeRosa has been active in hedge fund management, currency trading, and institutional brokerage for over twenty years. He holds a PhD from the Graduate School of Business of the University of Chicago and an AB from the University of Chicago. He is the author of two highly regarded books on foreign exchange, Managing Foreign Exchange Risk and Options on Foreign Exchange.

Partial table of contents:

Foreign Exchange and Its Related Derivative Instruments (D. DeRosa).

FORWARDS AND FUTURES CONTRACTS ON FOREIGN EXCHANGE.

Forward and Futures Contracts on Foreign Exchange (D. DeRosa).

CURRENCY OPTION PRICING MODELS.

Foreign Currency Option Values (M. Garman & S. Kohlhagen).

Efficient Analytic Approximation of American Option Values (G. Barone-Adesi & R. Whaley).

CURRENCY FUTURES OPTIONS PRICING MODELS.

The Pricing of Commodity Contracts (F. Black).

On Valuing American Futures Options (R. Whaley).

IMPLIED VOLATILITY IN CURRENCY DERIVATIVES.

The Term Structure of Volatility Implied by Foreign Exchange Options (X. Xu & S. Taylor).

JUMP PROCESS AND STOCHASTIC VOLATILITY MODELS FOR CURRENCY DERIVATIVES.

On Jump Processes in the Foreign Exchange and Stock Markets (P. Jorion).

BARRIER, BINARY, AND AVERAGE CURRENCY OPTIONS.

On Pricing Barrier Options (P. Ritchken).

One-Touch Double Barrier Binary Option Values (C. Hui).

Pricing European Average Rate Currency Options (E. Levy).

QUANTOS OPTIONS AND EQUITY WARRANTS WITH SPECIAL CURRENCY FEATURES.

The Perfect Hedge: To Quanto or Not to Quanto (C. Piros).

Index.