HCBE Faculty Articles

ORCID

Rebecca Abraham 0000-0002-3144-7759

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Document Type

Article

Publication Title

Theoretical Economics Letters

ISSN

2162-2078

Publication Date

8-24-2018

Abstract/Excerpt

Investors who seek to profit from depreciating currencies may invest in put options. Upon option exercise, the currency is sold at a high price, and then purchased at the lower future currency value, resulting in a gain for the put buyer. A series of such transactions yields a stream of income for the put investor. Alternatively, the investor could short sell the currency, reaping gains from the difference between the high short sale price and the low future purchase price. This paper derives the theoretical formulations for combined short sale and puts purchase strategies for the US dollar, the Euro, the Australian dollar and the New Zealand dollar, and the Mexican peso. Utility functions are based upon an assumption of declining risk aversio with negative rescale factors and positive threshold factors in a hyperbolic cosine distribution. This distribution intersects with the cosine distribution of short sale prices on the U. S. dollar, the lognormal distribution of short sale prices on the Euro, the Weiner process for shorts on the Australian dollar and the New Zealand dollar, and the Laplace currency distribution for peso shorts. Similar utility functions intersect with Levy-Khintchine jump processes to provide put option prices for each type of foreign currency.

DOI

https://doi.org/10.4236/tel.2018.811165

Volume

8

Issue

11

First Page

2569

Last Page

2593

Creative Commons License

Creative Commons Attribution-Share Alike 4.0 International License
This work is licensed under a Creative Commons Attribution-Share Alike 4.0 International License.

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