Alternative volatility models for pricing European currency options

Hoque, A.ORCID: 0000-0001-8369-6653 (2007) Alternative volatility models for pricing European currency options. In: 20th Australasian Finance & Banking Conference, 12 - 14 December, Sydney, NSW, Australia

Abstract

This paper focuses on modeling foreign exchange return behavior that would result in more accurate currency options pricing. These alternative approaches namely, implied volatility model (IVM), realized volatility model (RVM) and GARCH (1,1) volatility model (GVM) are used in this study. The results, in general suggest that RVM outperforms both IVM and GVM in pricing currency options. In-sample, there is no significant difference between IVM and GVM, but GVM performs better in pricing options than IVM out-of sample. An implication of our findings is that the traders can use the RVM for high-frequency intra-day data to exploit significant information for pricing next trading day options more accurately.

Item Type:	Conference Paper
URI:	http://researchrepository.murdoch.edu.au/id/eprint/39627

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