ABSTRACT
Foreign exchange (FX)-linked structured products refer to any combination of FX options and other FX products, including FX-linked forwards and swaps. As the world is becoming more interconnected under globalization, the demand for financial products that serve to hedge or speculate against foreign exchange-related risk has been increasing. Under the Black-Scholes (BS) model, the FX rate is assumed to follow geometric Brownian motion (GBM) with constant drift and volatility. In order to verify the foregoing analytical solution, sample paths of the FX rate process can be generated under the assumptions of the BS model. Besides a simple model like the BS model, Monte Carlo simulation (MCS) is also capable of tackling more complicated models such as the Heston model. In the Heston model, the price and the volatility of the underlying are stochastic, it is hard to price the product with a closed-form solution, binomial tree, and finite difference methods. Thus, MCS is used to price the product.
