Target Zone Exchange Rate Option Pricing

Abstract

This paper provides a short introduction to the topic of target zone exchange rate option pricing. Models covered include: Black-Scholes equation with derivation, European Call on a stock option, Garman-Kohlhagen model for an option on a free-floating exchange rate, Dumas Jennergren and Naslund model for an exchange rate option within a fully credible target zone and a discussion of the relationship between empirical option pricing data and partial target zone credibility.

Keywords: exchange rate, target zone, Black-Scholes, Garman-Kohlhagen, option pricing

JEL Classification: E43, E44, E47, F31, F47, G12, G13, G15, G18