Biger And Hull
Currency call option pricing model for premium estimation
First the value of d is calculated
(1)\begin{align} d=\frac{\ln\frac{S}{X}+(r-f+\frac{\sigma^2}{2})T}{\sigma\sqrt{T}} \end{align}
Next the d value is inserted with other terms as shown below into the following equation
(2)\begin{align} C=\frac{S}{e^f^T}N(d)-\frac{X}{e^r^T}N(d-\sigma\sqrt{T}) \end{align}
The symbols are defined as follows:
C= Currency call option premium
S = Spot exchange rate of underlying foreign currency
X = eXercise price of call option
r = rate of domestic interest
f = foreign rate of interest
\sigma = Standard deviation rate of underlying foreign currency
T = Time until option expires measured in years
N(.) = Cumulative area under the standard normal distribution function from negative infinity to d
Bibliography
1. Nahum Biger and John Hull, "The valuation of currency options," Financial Management (Spring 1983), 24-28
page revision: 0, last edited: 29 Apr 2009 19:26