Hostname: page-component-78c5997874-g7gxr Total loading time: 0 Render date: 2024-11-15T03:27:04.110Z Has data issue: false hasContentIssue false
  • English
  • Français

Pricing European Currency Options: A Comparison of the Modified Black-Scholes Model and a Random Variance Model

Published online by Cambridge University Press:  06 April 2009

Marc Chesney  and
Louis Scott
Get access Rights & Permissions [Opens in a new window]

Abstract

We use the modified Black-Scholes model and a random variance option pricing model to study prices of European currency options traded in Geneva. The options, which cannot be exercised early, include calls and puts on the dollar/Swiss franc exchange rate. In the empirical analysis, we examine the model fit and the biases with respect to the strike price, time to maturity, and volatility. There is some evidence of mispricing and there are small gains available by trading with the random variance model.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 24 , Issue 3 , September 1989 , pp. 267 - 284
Copyright
Copyright © School of Business Administration, University of Washington 1989

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Biger, N., and Hull, J. C.. “The Valuation of Currency Options.” Financial Management, 12 (Spring 1983), 24–28.CrossRefGoogle Scholar
Black, F., and Scholes, M.. “The Pricing of Options and Corporate Liabilities.” Journal of Political Economy, 81 (05 1973), 637–659.CrossRefGoogle Scholar
Bodurtha, J., and Courtadon, G.. “Efficiency Tests of the Foreign Currency Market.” Journal of Finance, 41 (03 1986), 151–162.CrossRefGoogle Scholar
Bodurtha, J., and Courtadon, G. “Tests of an American Option Pricing Model on the Foreign Currency Options Market.” Journal of Financial and Quantitative Analysis, 22 (06 1987), 153–168.CrossRefGoogle Scholar
Bollerslev, T. “A Conditionally Heteroskedastic Time Series Model for Speculative Prices and Rates of Return.” Review of Economics and Statistics, 69 (08 1987), 542–547.CrossRefGoogle Scholar
Boyle, P. P. “Options: A Monte Carlo Approach.” Journal of Financial Economics, 4 (05 1977), 323–338.CrossRefGoogle Scholar
Boyle, P. P., and Emanuel, D.. “Discretely Adjusted Option Hedges.” Journal of Financial Economics, 8 (09 1980), 259–282.CrossRefGoogle Scholar
Chesney, M. “Prix d'Equilibre et Efficience sur le Marché Suisse des Options sur Devises.” Finance, 7 (12 1986), 149–167.Google Scholar
Chesney, M., and Loubergé, H.. “The Pricing of European Currency Options: Empirical Tests Based on Swiss Data.” Aussenwirtschaft, Heft II/III (1987), 213–228.Google Scholar
Cox, J. C.; Ingersoll, J. E.; and Ross, S. A.. “An Intertemporal General Equilibrium Model of Asset Prices.” Econometrica, 53 (03 1985), 363–384.CrossRefGoogle Scholar
Cox, J. C.; Ingersoll, J. E.; and Ross, S. A..“A Theory of the Term Structure of Interest Rates.” Econometrica, 53 (03 1985), 385–408.CrossRefGoogle Scholar
Cox, J. C., and Rubinstein, M.. Options Markets. Englewood Cliffs, NJ: Prentice–Hall (1985).Google Scholar
Galai, D. “The Components of the Return from Hedging Options against Stocks.” Journal of Business, 56 (01 1983), 45–54.CrossRefGoogle Scholar
Garman, M., and Kohlhagen, S.. “Foreign Currency Option Values.” Journal of International Money and Finance, 2 (12 1983), 231–237.CrossRefGoogle Scholar
Grabbe, J. “The Pricing of Call and Put Options on Foreign Exchange.” Journal of International Money and Finance, 2 (12 1983), 239–254.CrossRefGoogle Scholar
Hansen, L. P. “Large Sample Properties of Generalized Method of Moments Estimators.” Econometrica, 50 (07 1982), 1029–1054.CrossRefGoogle Scholar
Hull, J., and White, A.. “The Pricing of Options on Assets with Stochastic Volatilities.” Journal of Finance, 2 (06 1987a), 281–300.CrossRefGoogle Scholar
Hull, J., and White, A.. “Hedging the Risks from Writing Foreign Currency Options.” Journal of International Money and Finance, 6 (06 1987b), 131–152.CrossRefGoogle Scholar
Johnson, H., and Shanno, D.. “Option Pricing when the Variance Is Changing.” Journal of Financial and Quantitative Analysis, 22 (06 1987), 143–152.CrossRefGoogle Scholar
Macbeth, J., and Merville, L.. “An Empirical Examination of the Black-Scholes Call Option Pricing Model.” Journal of Finance, 34 (12 1979), 1173–1186.Google Scholar
Rubinstein, M. “Nonparametric Tests of Alternative Option Pricing Models Using All Reported Trades and Quotes on the 30 Most Active CBOE Option Classes from August 23, 1976 through August 31, 1978.” Journal of Finance, 40 (06 1985), 455–480.CrossRefGoogle Scholar
Shastri, K., and Tandon, K.. “Arbitrage Tests of the Efficiency of the Foreign Currency Options Market.” Journal of International Money and Finance, 4 (12 1985), 455–468.CrossRefGoogle Scholar
Shastri, K., and Tandon, K.. “Valuation of Foreign Currency Options: Some Empirical Tests.” Journal of Financial and Quantitative Analysis, 21 (06 1986), 145–160.CrossRefGoogle Scholar
Scott, L. O. “Option Pricing when the Variance Changes Randomly: Theory, Estimation, and an Application.” Journal of Financial and Quantitative Analysis, 22 (12 1987), 419–438.CrossRefGoogle Scholar
Scott, L. O. “Random Variance Option Pricing: Empirical Tests of the Model and Delta-Sigma Hedging.” Working Paper, Univ. of Illinois (03 1988).Google Scholar
Wasserfallen, W., and Zimmerman, H.. “The Wiener Process, Variance Measurement and Option Pricing—Evidence from Intra–Daily Data on Foreign Exchange.” Working Paper, Univ. of Bern and Hochschule St. Gallen (10 1986).Google Scholar
Whaley, R. E. “Valuation of American Call Options on Dividend-Paying Stocks: Empirical Tests.” Journal of Financial Economics, 10 (03 1982), 29–58.CrossRefGoogle Scholar
Wiggins, J. B. “Option Values under Stochastic Volatility: Theory and Empirical Estimates.” Journal of Financial Economics, 19 (12 1987), 351–372.CrossRefGoogle Scholar