| Summary: | 碩士 === 世新大學 === 經濟學研究所(含碩專班) === 89 === Within the Heath-Jarrow-Morton (1992) framework, this thesis studies the pricing and hedging of four European foreign bond options. These four options are: (1) foreign bond call struck in foreign currency; (2) foreign bond call struck in domestic currency; (3) fixed exchange rate foreign bond call, which is also called "Quanto bond option" and (4) bond linked foreign exchange call. We, first, derive pricing and hedging formulae for these four options by applying the forward martingale measure method. In the second step, simulations are used to demonstrate how exponentially dampened shape and humped shape volatility structures of the forward interest rate affect the value of these four options.
The main issues that will be discussed are the relationship between the call premiums and (1) the shapes of volatility structures, and (2) the peak year of the humped volatility structure. Simulation results show that the differences of call premiums between exponentially dampened shape and humped shape volatility structure are significant for the first three options. Moreover, the larger the peak year of the humped volatility structure, the higher the call premiums are for the most cases. Therefore, the effect of shapes of volatility structure of the forward interest rate should not be neglected when pricing these four options.
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