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The option onnassets with exchange rate and exercise price risk

Authors
Journal
Journal of Multinational Financial Management
1042-444X
Publisher
Elsevier
Publication Date
Volume
11
Issue
1
Identifiers
DOI: 10.1016/s1042-444x(00)00039-6
Keywords
  • Derivatives Models
  • Exchange Rate Risk
  • Measure Transform
  • Real Options
Disciplines
  • Mathematics
  • Physics

Abstract

Abstract Solutions to the call option on the maximum or the minimum of n assets are explicitly provided when the exercise price is stochastic, and all assets carry both asset price and exchange rate risk in a n+1 country model with 2( n+1) state variables. The model can be seen as an extension of Johnson (Johnson, H., 1987. Options on the maximum or the minimum of several assets. Journal of Financial and Quantitative Analysis 22, 227–283), Margrabe (Margrabe, W., 1978. The value of an option to exchange one asset for another. Journal of Finance 33, 177–186), and Reiner (Reiner, E., 1992. Quanto mechanics, RISK, March, 59–63), and it is useful for valuation of both financial and real options. As an application, a contract is valued that allows a portfolio manager to participate in the out-performance of the returns of international assets, portfolios or stock indexes.

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