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On the cost of delayed currency fixing announcements

Author

Listed:
  • Becker, Christoph
  • Wystup, Uwe
Abstract
In Foreign Exchange Markets vanilla and barrier options are traded frequently. The market standard is a cutoff time of 10:00 a.m. in New York for the strike of vanillas and a knock-out event based on a continuously observed barrier in the inter bank market. However, many clients, particularly from Italy, prefer the cutoff and knock-out event to be based on the fixing published by the European Central Bank on the Reuters Page ECB37. These barrier options are called discretely monitored barrier options. While these options can be priced in several models by various techniques, the ECB source of the fixing causes two problems. First of all, it is not tradable, and secondly it is published with a delay of about 10 - 20 minutes. We examine here the effect of these problems on the hedge of those options and consequently suggest a cost based on the additional uncertainty encountered.

Suggested Citation

  • Becker, Christoph & Wystup, Uwe, 2005. "On the cost of delayed currency fixing announcements," CPQF Working Paper Series 3, Frankfurt School of Finance and Management, Centre for Practical Quantitative Finance (CPQF).
    • Handle: RePEc:zbw:cpqfwp:3
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    References listed on IDEAS

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    Cited by:

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    7. Boenkost, Wolfram & Schmidt, Wolfgang M., 2006. "Interest rate convexity and the volatility smile," CPQF Working Paper Series 4, Frankfurt School of Finance and Management, Centre for Practical Quantitative Finance (CPQF).
    8. Böing, Philipp & Müller, Elisabeth, 2012. "Technological Capabilities of Chinese Enterprises: Who is Going to Compete Abroad?," VfS Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62081, Verein für Socialpolitik / German Economic Association.

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    More about this item

    Keywords

    exotic options; currency fixings;

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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