THE EFFECTS OF DOMESTIC AND FOREIGN YIELD CURVES ON THE VALUE OF CURRENCY AMERICAN CALL OPTIONS

This paper examines the sensitivity of the values of foreign currency American call options to the domestic and foreign term structures of interest rates. Pricing performances of currency option models are compared with and without the term structure effects. It is shown that there exist significant pricing biases if flat yield curves are assumed, and that different shapes of domestic and foreign yield curves can have major impacts on currency option prices. © 1990.