Modeling volatility in foreign currency option pricing

Hoque, Ariful and Chan, Felix and Manzur, Meher (2009) Modeling volatility in foreign currency option pricing. Multinational Finance Journal, 13 (1/2). pp. 181-200. ISSN 1096-1879

Abstract

[Abstract]: 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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Item Type: Article (Commonwealth Reporting Category C)
Refereed: Yes
Item Status: Live Archive
Additional Information: Awaiting copyright advice.
Depositing User: Dr Ariful Hoque
Faculty / Department / School: Historic - Faculty of Business - School of Accounting, Economics and Finance
Date Deposited: 06 Nov 2009 02:04
Last Modified: 02 Jul 2013 23:28
Uncontrolled Keywords: foreign currency options, implied volatility, optimal volatility,multiplicative error model, GARCH model
Fields of Research (FOR2008): 15 Commerce, Management, Tourism and Services > 1502 Banking, Finance and Investment > 150201 Finance
URI: http://eprints.usq.edu.au/id/eprint/6045

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