Arbitrage in Cross Currency Options

Abstract

The currency option markets, both the dollar-denominated option market and the cross-currency option market, carry important economic information about the evolution of exchange rates and the pricing of risk. However, it is challenging to integrate all this information together. This paper lays the groundwork for analysis by establishing the conditions under which the prices across these markets are mutually consistent, and are free from arbitrage trades.

Presented by Roman Kozhan