Abstract In this paper we apply timevarying tcopulas to price a CFXO borrowing the pricing method for CDOs (collateralized debt obligations). We first give the theoretical pricing model for a CFXO, and then we apply timevarying tcopula to calculate the price for a CFXO written on the exchange rates between U.S. dollar, Japanese yen, Great British Pound and Euro. With the correlation coefficient timevarying, tcopula can be used to describe the time varying correlation between exchange rates. CFXO (Collateralized Foreign Exchange Obligation) is a new kind of foreign exchange derivatives, allowing risk protection buyers to hedge the foreign exchange risk for a basket of currency assets, and at the same time allowing protection sellers to benefit from chosen tranche. CFXO provides a new effective portfolio diversification tool for investors.
2012, Vol. 9 
