Essays in international finance
Abstract
The economics of option pricing in general and foreign currency options in particular are usually based on the assumptions of the Black and Scholes model where the returns on the underlying asset are assumed to follow a normal distribution. But how well does this model fit reality and how can it reveal alternate distributional choices? We presume a geometric brownian motion for the exchange rate, investigate the type of distribution that might best portray reality, and finally provide a diagnosis across the different categories of options in the hope of uncovering unusual pricing patterns in the foreign currency option market. We study systematic deviations of the Black and Scholes implied prices, adjusted for the early exercise premium, from observed option market prices. We try to draw conclusions on whether these deviations are characteristic of some other alternative exchange rate processes in that either the path of the underlying asset is not continuous through time or that the volatility of its rate of return is stochastic. This part also investigates the sort of problems which might arise from a data aggregation type of analysis such as the nonstationarity of the underlying distribution and presents an alternative methodology to circumvent them. This paper studies default decisions in the international loan markets under stochastic exchange rates and uncertain future income. Because of the uncertainty in future income and exchange rate movements, there is a positive probability that a debtor cannot fulfill his obligations and consequently defaults. The motivation stems from the empirical evidence that debtors have the tendency to default when their currency is depreciating. The reason is that more capital is needed to pay the interest and that would obviously translate to giving up more consumption. (Abstract shortened with permission of author.)
Subject Area
Finance
Recommended Citation
Ben-Khelifa, Zouhaeir Charfeddine, "Essays in international finance" (1991). Dissertations available from ProQuest. AAI9200312.
https://repository.upenn.edu/dissertations/AAI9200312