An Extended Model of Currency Options Applicable as Policy Tool for Central Banks with Inflation Targeting and Dollarized Economies

Luis-Felipe Arizmendi

GPI Asset Management S.A., Lima, Perú.

DOI: 10.4236/tel.[phone]                

Abstract

The purpose of this paper is to provide a new set of tools for policy makers at central banks. Based on the Garman-Kohlhagen [1] formula for currency options, this research extends it with the Taylor-rule expression used for inflation targeting, thus obtaining the corresponding Call and Put options and the first and higher-degree partial derivatives known as “Greeks” for key variables such as the policy target domestic interest rate and the output gap.

Keywords

Inflation Targeting; Central Bank Policies; Exchange Rates; Currency Options

Conflicts of Interest

The authors declare no conflicts of interest.

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