ADMS 1000 Lecture Notes - Lecture 21: Valuation Of Options

• School: York University
• Department: Administrative Studies
• Course: ADMS 1000
• Professor: Alan Shapiro

Document Summary

The equation is based on the stock option pricing model (opm) when allowing for continuous dividends. Since the interest gained on holding a foreign security (r*) is equivalent to a continuously paid dividend on a stock share, this version of the opm holds completely. American currency options than on european currency options with similar characteristics. However, there is not a closed-form model for pricing american currency options. Although various techniques are used to price american currency options, the european model is commonly applied to price american currency options because it can be just as accurate. The interest gained on holding a foreign security (r*) is equivalent to a continuously paid dividend on a stock share, this version of the opm holds completely. The key transformation in adapting the stock opm to value currency options is the substitution of exchange rates for stock prices.