Currency valuation

Equation (3.47) calculates the tariffs that have to be paid for import of raw materials. Duty drawbacks are considered by charging tariffs only for raw materials required for production of intermediate (second line) and finished goods (first line) that are not re-exported. The amount of intermediates not re-exported is adjusted for those intermediates that are transformed into goods subsequently re-exported at the same site. The formulation rests on the assumption that only one raw material source is used per site and that if a required intermediate is available locally the local source is used. Prices are converted from the currency used by the raw material supplier to the currency of the consuming site. Same as with the valuation of finished goods for tariff calculation the full transport costs are included in the tariff value of the raw materials and intermediates. Import tariffs for intermediates imported from another site are calculated in equation (3.48). The formulation differs from the one for raw materials because the source of the intermediates is not predetermined and the transfer price does not contain transportation costs. The net volumes of the intermediates which are not re-exported are calculated by subtracting the quantities contained in exported products from the total quantity imported. A non-negativity constraint sets the value to 0 if the respective intermediate is not imported from site s. ... 

Incorrect calibration produces errors in option valuation that may be discovered only after significant losses have been suffered. If the necessary data are not available to calibrate a sophisticated model, a simpler one may need to be used. This is not an issue for products priced in major currencies such as the dollar, sterling, or euro, but it can be a problem for other currencies. That might be why the B-S model is still widely used today, although models such as the Black-Derman-Toy and the one proposed in Brace, Gatarek, and Musiela (1994) are increasingly employed for more exotic option products. 

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