Modeling Exchange Rate Return Behavior for Pricing Currency Options

摘要：

Since the currency options derive their values from the underlying foreign currencies,their pricing are closely related to the expected volatility of the underlying exchange rates.This study focuses on modeling the time varying nature of the underlying exchange rate volatility.It explores the possibility of using an implied volatility model (IVM) and a GARCH (1,1)-based volatility model (GVM) to generate inputs for Black-Schole (1973) options pricing formula.Since in-sample tests provide a mixed result,the ability of IVM and GVM is not distinguishable to describe the unobservable underlying exchange rate return behavior.The out-of-sample tests results strongly suggest that IVM is more capable to capture underlying exchange rate return behavior to forecast options prices with higher accuracy.

关键词： implied volatility model GARCH (1,1) volatility model in-sample out-of-sample currency options valuation

作者: Ariful Hoque

作者单位: Curtin University of Technology

会议类型: 国际会议

会议名称: The 2008 International Conference on Business Intelligence and Financial Engineering(BIFE 2008)(商业智能和金融工程国际会议)

会议地点: 长沙

会议语种:英文

页码: 1-20

在线出版日期: 2008-10-28（万方平台首次上网日期，不代表论文的发表时间）