Hok, Julien;
Tse, Alex;
(2024)
FX Open Forward.
Quantitative Finance
, 24
(8)
pp. 1037-1055.
10.1080/14697688.2024.2388802.
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Abstract
FX Open Forward is a derivative instrument where the contract holder has the obligation to purchase a specific amount of foreign currency under a fixed exchange rate by the contract expiry date. In contrast to a traditional forward contract, a distinctive feature of FX Open Forward is that the timing and notional size of the currency conversion can be freely chosen by the contract holder. Under a Black–Scholes model where interest rates can be negative, we provide a complete solution of the early exercise strategy of an FX Open Forward. When domestic rate and foreign rate are both positive (negative), the full contractual notional should be exercised when the spot FX level is sufficiently high (low). Unlike American options, the optimal waiting region of FX Open Forward is always connected even when interest rates are negative
| Type: | Article |
|---|---|
| Title: | FX Open Forward |
| Open access status: | An open access version is available from UCL Discovery |
| DOI: | 10.1080/14697688.2024.2388802 |
| Publisher version: | https://doi.org/10.1080/14697688.2024.2388802 |
| Language: | English |
| Additional information: | This is an Open Access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives License (http://creativecommons.org/licenses/by-nc-nd/4.0/), which permits non-commercial re-use, distribution, and reproduction in any medium, provided the original work is properly cited, and is not altered, transformed,or built upon in any way. The terms on which this article has been published allow the posting of the Accepted Manuscript in a repository by the author(s) or with their consent. |
| Keywords: | FX Open Forward, American derivative, Optimal stopping, Free-boundary problem |
| UCL classification: | UCL UCL > Provost and Vice Provost Offices > UCL BEAMS UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Maths and Physical Sciences UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Maths and Physical Sciences > Dept of Mathematics |
| URI: | https://discovery.ucl.ac.uk/id/eprint/10195326 |
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