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Researching FX Credit Hybrid Options Linked to Sovereign Default

Article Quant Q&A · Author: Nick
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Summary

The document proposes FX-credit hybrids as a possible undergraduate research topic. These contracts combine an FX option, forward, or cross-currency swap with a trigger tied to a credit event. The example is a right to exchange dollars for euros that terminates if either of two specified sovereigns defaults. The suggested pricing question is how the currency might move after default, since that view affects the contract’s value.

The response favors exploring the interaction between credit events and currency exposure over studying exotic payoff shapes alone. It offers an idea rather than a developed pricing method: there are no models, data, calculations, or empirical results. The proposal therefore needs substantial narrowing, such as defining the credit trigger, currency pair, event assumptions, and valuation framework. The answer also briefly mentions using Bitcoin as a currency, but does not explain how that would change the analysis.

Key ideas

  • FX-credit hybrids combine currency products with credit-event triggers.
  • A contract can terminate when a specified sovereign defaults.
  • Valuation may depend on the expected currency move following default.
  • The proposal suggests a research direction but provides no pricing model or empirical evidence.

Tags

ForexOptionsEvent-drivenDerivatives pricing
Full text
# Undergraduate research topic in options


# Undergraduate research topic in options












I'm an undergraduate student in finance with a pretty solid knowledge of financial mathematics and I'm currently picking a topic for my research paper this year. I have already decided I will pick something about FX exotic options but I am not sure what exactly to pick as I'm new to the topic and a bit overwhelmed with the amount of information I consumed in the past couple of days regarding exotic options. I am trying to come up with a short list of potential topics and decided to ask for help here.

Can anyone suggest an interesting question(s) to explore regarding FX exotic options?

Thank you in advance!

## Answer by Dimitri Vulis (score 4)

https://quant.stackexchange.com/a/58485

This question will probably get closed soon, but I'll take a stab at answering anyway.

I think, for an undergraduate, an interesting topic would be the FX-credit hybrids, that is, FX options (or even linear products like FX forwards and xccy swaps) with kick-in or kick-out on a credit event.

For example - I want (the right) to exchange USD into EUR at some strike exchange rate, but this contract extinguishes if any of (Italy, France) defaults on sovereign debt.

You can consider Bitcon to be one of the currencies.

To price such a trade, you take a view on how much the currency will devalue after a default.

I think it's more fun that exotic payoffs.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.