e will be considering USD and GBP
markets equipped with LIBOR prices and spot riskless rates. There is currency
exchange market with quotes on spot exchange rate and forward exchange
agreements. We already saw how to construct market models for each of the
markets and price fixed income derivatives. The present chapter treats pricing
of derivatives dependent on both markets.
We will derive SDE for exchange rate, show how to change probability measure
from one market to another and apply these concepts to pricing of some cross
currency products.
The reference is
[Mercurio]
.
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