Currency Translated Option Functions |
  
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Currency Translated Option Functions |
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Currency Translated options
Currency translated options are options on foreign assets where the payoff is exchanged into domestic currency at expiration. For example, a U.S. investor is interested in buying an option that is linked to the Nikkei index that is priced in yen. There are two types or risks, changing prices and exchange rates, to consider when valuing currency-translated options.
Currency Translated functions:
Equity Linked Foreign Exchange |
An equity-linked foreign-exchange option is an option on the foreign exchange rate and is linked to the forward price of a stock or equity index. This option can be priced analytically using a model introduced by Reiner (1992). The FinOptions function EquityLinkedFX can be used to evaluate European equity-linked foreign-exchange options. |
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Foreign Equity |
A foreign equity option is an option on a foreign asset where the strike price is specified in either domestic or foreign currency and the payoff at expiration is valued in domestic currency. Foreign equity options can be priced analytically using a model introduced by Reiner (1992). The FinOptions function Foreign Equity can be used to evaluate European foreign equity options. |
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Quanto |
A fixed exchange-rate foreign-equity option (Quanto) is denominated in another currency than that of the underlying equity exposure. The face value of the currency protection expands or contracts to cover changes in the foreign currency value of the underlying asset [1]. Quanto options can be priced analytically using a model published by Dravid, Richardson, and Sun (1993). The FinOptions function Quanto can be used to evaluate European Quanto options. |
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Takeover Foreign Exchange |
A takeover foreign exchange call option gives the buyer the right purchase a specified number of units of foreign currency at a strike price if the corporate takeover is successful. This option can be priced analytically using a model introduced by Schnabel and Wei (1994). The FinOptions function TakeoverFX can be used to evaluate European takeover foreign exchange call options. |
The EquityLinkedFX function calculates the theoretical price, sensitivities, the implied volatility, the implied strike, and the implied correlation value of a European Equity-Linked Foreign-Exchange option using Reiner’s model. The valuation of the option is done in either domestic or foreign currency.
The Foreign Equity function calculates the theoretical price, sensitivities, the implied volatility, the implied strike, and the implied correlation value of a European Foreign Equity option struck in domestic currency using Reiner’s model. The valuation of the option is done in either domestic or foreign currency
The Quanto function calculates the theoretical price, sensitivities, the implied volatility, the implied strike, and the implied correlation value of a European Fixed Exchange-Rate Foreign-Equity option (Quanto) using a risk-neutral model developed by Dravid, Richardson, and Sun.
The TakeoverFX function calculates the theoretical price, sensitivities, the implied volatility, the implied strike, and the implied correlation value of a European takeover foreign exchange call option using a model developed by Schnabel and Wei.
References
[1] Haug E.G., The complete guide to option pricing formulas, 1998, McGraw-Hill