Yuhong Liu
Assistant Professor, National Cheng Kung University, Taiwan.
Zhi-Yuan Fong
Ph.D. Student, National Cheng Kung University, Taiwan.
I-Ming Jiang
Assistant Professor, Yuan Ze University, Taiwan.Analytical Upper Bounds for American Exotic
Currency Options with a Stochastic Skew Model
On the basis that most instruments traded on options markets are
American-style ones, this paper develops the analytical upper and
lower bounds of American cross-currency, self-quanto, and quanto
options under the stochastic skew model proposed by Carr and Wu
(2007) when domestic risk free rates are higher or lower than the
foreign risk free rates. The analytical bounds derived here are not only
very tight and accurate for American option pricing, but also offer a
quasi-closed form solution which is able to enhance evaluation and
hedging efficiency in real world markets. We also acquire the analytical
solutions for European cross-currency, self-quanto, and quanto options
given by applying two separate mean-reverting square-root processes
to two separate time-changed Lévy processes, consistent with the
realistic phenomena of currency returns.