Foreign Currency Option Values, Garman-Kohlhagen

Garman-Kohlhagen Foreign Currency Option Values

The Garman-Kohlhagen model is an application of the Black-Scholes option pricing model to foreign currency options. It was formulated by Mark B. Garman and Steven W. Kohlhagen and first published as Foreign Currency Option Values in the Journal of International Money and Finance in 1983 (Vol. 2, issue 3, pp. 231-237).

Mathematically, the Garman-Kohlhagen model is identical to Merton’s extension of the Black-Scholes model that accounts for dividends. In this case, the foreign currency interest rate is in place of the dividend yield (the domestic currency interest rate is the risk free interest rate as in the original Black-Scholes model).

Foreign Currency Option Values PDF

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http://www.sciencedirect.com/science/article/pii/S0261560683800011