A non-option financial instrument definifion has embedded optionality, such as an interest rate cap, can also have an implied volatility. Implied volatility, a forward-looking and subjective measure, differs from historical volatility because the latter is calculated from known past returns of a security. This means that 50% of your equity position is sheltered from exchange rate risk.
Six primary factors influence option pricing: the underlying price, strike price, time until expiration, volatility, interestMark B. Garman. Author links open the author workspace. Steven W. Kohlhagen. Click to expose these currencj author currdncy School of Business Administration, University of California at Berkeley, Berkeley CA 94720, USA Show more. Foreign exchange options are a recent market innovation.
The standard Black-Scholes option-pricing model does not apply well to foreign exchange options, since multiple interest rates are involved in ways differing from the Black-Scholes assumptions. The present paper develops fxcm free account assumptions leading to valuation formulas for foreign exchange options.
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