Hostname: page-component-78c5997874-g7gxr Total loading time: 0 Render date: 2024-11-15T20:34:12.348Z Has data issue: false hasContentIssue false
  • English
  • Français

Forward Exchange Price Determination in Continuous Time

Published online by Cambridge University Press:  19 October 2009

George S. Oldfield  and
Richard J. Messina
Get access Rights & Permissions [Opens in a new window]

Extract

The work of Black and Scholes [2] and Merton [4] suggests that analysis of hedged positions in a continuous time random walk model yields powerful insights into the valuation of financial securities. The present paper extends this methodology in a straightforward fashion to foreign exchange transactions. By adopting the device of hedging in a secondary market for forward currency contracts against a long position in spot currency, a simple statement of boundary conditions for the forward position can be detailed. This allows a direct solution of the continuous time valuation problem that yields the interest rate parity theory.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 12 , Issue 3 , September 1977 , pp. 473 - 479
Copyright
Copyright © School of Business Administration, University of Washington 1977

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

[1]Black, Fischer. “The Pricing of Commodity Contracts.” Journal of Financial Economics, Vol. 3 (January/March 1976).CrossRefGoogle Scholar
[2]Black, Fischer, and Scholes, Myron. “The Pricing of Options and Corporate Liabilities.” Journal of Political Economy, Vol. 81 (May/June 1973), pp. 637–654.CrossRefGoogle Scholar
[3]Cummins, Philip A.; Logue, Dennis E.; Sweeney, Richard James; and Willett, Thomas D.. “Aspects of Efficiency in the U.S./Canadian Foreign Exchange Market.” Unpublished paper (October 1975).Google Scholar
[4]Merton, Robert C. “The Theory of Rational Option Pricing.” The Bell Journal of Economics and Management Science, Vol. 4 (Spring 1973), pp. 141–183.CrossRefGoogle Scholar
[5]Westerfield, Janice M. A Theoretical and Empirical Examination of Risk in the Foreign Exchange Markets. Ph.D. dissertation, University of Pennsylvania (1974).Google Scholar