Binomial pricing of an American call on currency futures

Share:

Description

Pricing of currency futures American option using a binomial approximation

Usage

1
am_call_bin_currency(S, K, r, r_f, sigma, t, steps)

Arguments

S

spot price

K

exercice price

r

domestic interest rate

r_f

foreign interest rate

sigma

volatility

t

time to maturity

steps

number of steps in binomial tree

Details

American options written on foreign currencies are priced using a standard binomial tree. The notable point is that early exercise is driven by the difference between national interest rates.

Value

call_price

Option price

Author(s)

Paolo Zagaglia, paolo.zagaglia@gmail.com

References

John Hull, "Options, Futures and other Derivative Securities", Prentice-Hall, second edition, 1993.

Examples

 1
 2
 3
 4
 5
 6
 7
 8
 9
10
11
rm(list=ls())

S<-50 
K<-52
r<-0.08 
r_f<-0.05
sigma<-0.2 
t<-0.5
steps<-100

call_price_bin_currency<-am_call_bin_currency(S, K, r, r_f, sigma, t, steps)