Cross-currency equity swaps in the BGM model

Ting Pin Wu, Son Nan Chen

Research output: Contribution to journalArticlepeer-review

8 Scopus citations

Abstract

Under the arbitrage-free framework of the HJM model (Heath, Jarrow and Morton [1992]), this article simultaneously extends the BGM model (Brace, Gatarek and Musiela [1997]) from a singlecurrency economy to a cross-currency case and incorporates the stock price dynamics under the martingale measure. The resulting model is very general for pricing almost every kind of cross-currency equity swap traded in over-The-counter markets. Pricing formulas for equity swaps with hedged or unhedged exchange rate risk are derived using either a constant or a variable notional principal. The calibration procedure, hedging strategies, and numerical examples are also provided.

Original languageEnglish
Pages (from-to)60-76
Number of pages17
JournalJournal of Derivatives
Volume15
Issue number2
DOIs
StatePublished - 1 Dec 2007

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