VALUATION OF LIBOR-CONTINGENT FX OPTIONS

A LIBOR-Contingent FX option represents a currency option whose payoff occurs only if a prespecified interest rate at maturity is either abo ve or below a prespecified level. The product permits investors to exp ress an exchange rate view that is based on, or coupled with, an inter est rate view and is less expensive than a plain-vanilla FX option. Th is paper provides analytic solutions for pricing several types of LIBO R-Contingent FX options under certain specifications of the initial do mestic forward curve, foreign forward curve and the exchange rate. Sim ulations are conducted to illustrate certain properties of these produ cts. (C) 1998 Elsevier Science B.V. All rights reserved.