The Valuation of Currency Options

Biger, Nahum; Hull, John C.

doi:10.2307/3664834

Cited by 125 publications

(62 citation statements)

References 8 publications

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“…This further illustrates the di®erence between currency options and stock options. 9 Note that the market portfolio in this small open economy consists of the domestic stock and the foreign bond. If the domestic agent did not hold foreign bond in equilibrium, this small open economy would be similar to a closed economy in which the market portfolio is the domestic stock.…”

Section: Domestic Risk-averse Agent's Valuation Of Currency and Stockmentioning

confidence: 99%

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Systematic jump risks in a small open economy: simultaneous equilibrium valuation of options on the market portfolio and the exchange rate

Cao

2001

Journal of International Money and Finance

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The valuation of stock options and currency options has witnessed an explosion of new development in the past twenty years. These models, set up either in a partial equilibrium or a general equilibrium framework, have certainly enriched our understanding of option valuation in one way or the other. However, the main drawback of these models is that stock options and currency options are analyzed in separate contexts. The co-movement of the stock market and the currency market is absent from the option valuation analysis. Such co-movement is extremely important and is best illustrated by the Southeast Asian¯nancial crisis.To overcome this drawback, this paper uses an equilibrium model to investigate the joint dynamics of the exchange rate and the market portfolio in a small open monetary economy with jump-di®usion money supplies and aggregate dividends. It is shown that the exchange rate and the market portfolio are strongly correlated since both are driven by the same economic fundamentals. Furthermore, options on the exchange rate and the market portfolio are evaluated in the same equilibrium context. The analysis shows that parameters describing the same economic fundamentals have very di®erent e®ects on currency and stock options.

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Section: Domestic Risk-averse Agent's Valuation Of Currency and Stockmentioning

confidence: 99%

“…Examples for Currency option models include Biger and Hull (1983), Garman and Kohlhagen (1983), Grabbe (1983), Chesney and Scott (1989), Amin and Jarrow (1991), Heston (1993), Bates (1996), Bakshi and Chen (1997). The references listed here are by no means exhaustive.…”

Section: Introductionmentioning

confidence: 99%

Systematic jump risks in a small open economy: simultaneous equilibrium valuation of options on the market portfolio and the exchange rate

Cao

2001

Journal of International Money and Finance

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“…spot exchange rate at time ; Biger and Hull (1983), the price of a European call option on currency is,…”

Section: Methodology and Datamentioning

confidence: 99%

Modeling Volatility in Foreign Currency Option Pricing

Hoque¹,

Chan²,

Manzur

2009

MFJ

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This paper presents a general optimization framework to forecast put and call option prices by exploiting the volatility of the options prices. The approach is flexible in that different objective functions for predicting the underlying volatility can be modified and adapted in the proposed framework. The framework is implemented empirically for four major currencies, including Euro. The forecast performance of this framework is compared with those of the Multiplicative Error Model (MEM) of implied volatility and the GARCH(1,1). The results indicate that the proposed framework is capable of producing reasonable accurate forecasts for put and call prices.(JEL: G12, G13)

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“…Notice that if the two persistence parameters, û 1 and û 2 , are set equal to zero, our pricing result simplifies to the one under homoscedastic exchange rate returns [see, e.g., Biger and Hull (1983), and Garman and Kohlgahen (1983)]. As mentioned earlier, our setup allows not only fat tails in returns, but also a correlation between the lagged exchange rate return and the conditional variance, both of which will affect the value of foreign currency options.…”

Section: Remarkmentioning

confidence: 99%

Pricing Foreign Currency and Cross-Currency Options Under GARCH

Duan

Wei

1999

JOD

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The main objective of this paper is to propose an alternative valuation framework for pricing foreign currency and cross-currency options, which is capable of accommodating existing empirical regularities. The paper generalizes the GARCH option pricing methodology of Duan (1995) to a twocountry setting. Specifically, we assume a bivariate nonlinear GARCH system for the exchange rate and the foreign asset price, and generalize the local risk-neutral valuation principle for pricing derivatives. We define an equilibrium price measure in the two-country economy and derive the locally risk-neutralized GARCH processes for the exchange rate and the foreign asset price. Foreign currency options and cross-currency options are then valued using Monte Carlo simulations. Our setup accommodates rich empirical regularities such as stochastic volatility, fat tailed distributions and leverage effect extensively documented for financial data series. Numerical results show that our proposed model exhibits properties that are consistent with the documented empirical regularities for foreign currency options and quanto options.

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The Valuation of Currency Options

Cited by 125 publications

References 8 publications

Systematic jump risks in a small open economy: simultaneous equilibrium valuation of options on the market portfolio and the exchange rate

Systematic jump risks in a small open economy: simultaneous equilibrium valuation of options on the market portfolio and the exchange rate

Modeling Volatility in Foreign Currency Option Pricing

Pricing Foreign Currency and Cross-Currency Options Under GARCH

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