The main objective of this paper is to propose an alternative valuation framework for pricing foreign currency and cross-currency options, which is capable of accommodating existing empirical regularities. The paper generalizes the GARCH option pricing methodology of Duan (1995) to a two-country setting. Specifically, we assume a bivariate nonlinear GARCH system for the exchange rate and the fo...

We consider two types of rms both operating in two countries. The demand side of the markets of the two countries are separated and each type of rm produces its good in one of these countries. We study the e ect of an exchange rate change on the competitive equilibrium prices in each country. When producing for the foreign market causes the same costs as producing for the home market then the `...

This note uses a nonlinear structural vector autoregression model to empirically investigate the effectiveness of official foreign exchange (FX) interventions in an economy when interest rates are constrained to the zero level, based on Japanese data in the 1990s. The model allows us to estimate the effects of FX interventions operating through different channels. We find that FX interventions ...

This paper addresses the question of how exchange rates affect consumer demand in markets where advertising plays an important role. We identify an effect that has not been emphasized in the existing literature: when foreign exchange rates appreciate, a foreign product becomes more expensive to domestic consumers, but at the same time, advertising becomes cheaper for the foreign advertiser. Thu...