Sovereign spreads can be broken up into two components: the expected loss from default and the risk premium, with the latter reflecting how investors price the risk of unexpected losses. We show that the risk premium is often the larger part of the spread

We develop a new framework of foreign exchange (FX) options pricing under intervention and incorporate the effect of intervention by assuming a FX rate process which is stopped by a hitting time of an absorption boundary. More importantly, the proposed model satisfies the arbitrage-free...