Timeline for Option Payoff in Different Currencies
Current License: CC BY-SA 4.0
3 events
| when toggle format | what | by | license | comment | |
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| Jul 25, 2023 at 8:48 | comment | added | Kurt G. | These two option prices are the same. Converting an arbitrary payoff into another currency makes it a payoff in that currency. Calculate its PV in that currency and convert it back to the original currency. If that yielded a PV that is different from the original PV we would have an arbitrage. When you let this sink in you will realize that one does not even need math to come to this conclusion. | |
| Jul 24, 2023 at 2:10 | comment | added | Dimitri Vulis | Suppose that someone in the emerging markets issues two bonds denominated in local currency. Vanilla bond A just promises to pay 1 unit of local currency in 1 year. Whereas bond B promises that in 1 year, the issuer with observe the currency exchange rate and pay the USD amount equivalent at that time to 1 unit of local currency. I.e. B has an embedded non-delivery forward. What would you need to assume away in order for A and B to be discounted the same? The cross-currency basis is sometimes a lot. Also they'd be discounted for slightly different risks. | |
| Jul 24, 2023 at 0:18 | history | asked | Julie Taylor | CC BY-SA 4.0 |