The connection between interest rate parity and currency option

• Main Authors: Yawen Chuang, 莊雅雯
• Other Authors: Homou Wu
• Format: Others
• Language: zh-TW
• Published: 2002
• Online Access: http://ndltd.ncl.edu.tw/handle/32655355895473807160

碩士 === 國立臺灣大學 === 國際企業學研究所 === 90 === The existing currency option researches often take a partial equilibrium approach and under constant interest rates and volatility, but many empirical results shows that interest rates and volatility are stochastic. Then Bakshi and Chen(1997) developed a currency option model under stochastic interest rates and volatility, and there are a closed form solution in this model. The model Bakshi and Chen developed is based on the well known two-country monetary model of Lucas(1982). The two-country model is a general equilibrium model, and the exchange rates are determined by the purchasing power parity, rather than the interest rate parity. We would like to know that if the two-country model imply interest rate parity, and based on the hypothesis of interest rate parity, how to amend the currency option model of Bakshi and Chen. In Chapter 2, we review the related papers. In Chapter 3, we found out that the original Lucas two-country model doesn’t imply the uncovered interest rate parity. In order to verify that if the Lucas two-country model imply covered interest rate parity, we add the forward market to the model, then we find out that we can’t decide if the model imply covered interest rate parity when the forward is endogenously determined. Based on the result of Chapter 3, in Chapter 4 we use the hypothesis of interest rate parity to determine the exchange rate and find out the new equilibrium solution of the Lucas two-country model. In Chapter 5, we use the hypothesis of interest rate parity to amend the currency option model of Bakshi and Chen. Furthermore, we lead into other interest rate models such as Vasicek、HJM and CIR Model to develop other currency option models.