Abstract
The aim of the paper is paper is twofold. Firstly, we will derive an explicit closed formula for pricing the compound call option contingent upon a currency call option. Secondly, we will develop a pricing formula for the compound call option contingent upon the power call option.
Highlights
A party with the long position in a currency option has the right ( but not obligation) to trade (buy/sell) a predetermined amount of the Foreign currency at a fixed predetermined price (strike pricier in domestic currency) on the fixed agreed date (maturity/expiry)
A party with the long position in a currency option has the right to trade a predetermined amount of the Foreign currency at a fixed predetermined price on the fixed agreed date
The investor would prefer to enter into the long position currency call if he/she expects that the foreign currency is going to go high, on contrast, if the investor expects that the value of a foreign currency is going decline he/she will prefer to enter input option
Summary
A party with the long position in a currency option has the right ( but not obligation) to trade (buy/sell) a predetermined amount of the Foreign currency at a fixed predetermined price (strike pricier in domestic currency) on the fixed agreed date (maturity/expiry). We will derive an explicit closed formula for pricing the compound call option contingent upon a currency call option.
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