The Valuation of Currency Options

TLDR

The model, with relaxed assumptions, has many finance applications and has been reviewed by Smith, yet no organized market for foreign currency options exists. Foreign currency options are defined like stock options, e.g., a European call gives the right to buy one unit of the currency at a set exchange rate on a set date. The Philadelphia, Montreal, and Vancouver exchanges have proposed creating a foreign currency options market.

Abstract

extended with its underlying assumptions being relaxed. The model has also found many applications in finance. Smith [6] provides a good overall review of the subject. Options on a foreign currency can be defined in the same way as options on a stock. For example, a European call option on a foreign currency is an option to buy one unit of the currency on a predetermined date at a predetermined exchange rate. At the time of writing there is no well-organized market for foreign currency options. However, the Philadelphia, Montreal and Vancouver stock exchanges have all submitted proposals for the creation of such a market.