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Pricing Foreign Currency and Cross-Currency Options Under GARCH

Author

Listed:
  • Wei, J.Z.
  • Duan, J.C.

Abstract

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 princing methodology of Duan (1995) to a two-country setting.

Suggested Citation

  • Wei, J.Z. & Duan, J.C., 1999. "Pricing Foreign Currency and Cross-Currency Options Under GARCH," Rotman School of Management - Finance 99-01, Rotman School of Management, University of Toronto.
    • Handle: RePEc:fth:rotfin:99-01
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    Citations

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    Cited by:

    1. Hossein-Yekani, Seyed-Ali & Bakhshoodeh, Mohammad, 2006. "The importance of developing future contracts: a case study of Iran Agricultural Commodity Exchanges," MPRA Paper 29593, University Library of Munich, Germany.
    2. Xu, Weidong & Wu, Chongfeng & Li, Hongyi, 2011. "Accounting for the impact of higher order moments in foreign equity option pricing model," Economic Modelling, Elsevier, vol. 28(4), pages 1726-1729, July.
    3. James J. Kung & E-Ching Wu, 2014. "Which Random Walk Best Portrays the Dynamics of the Japanese Yen?," Australian Economic Papers, Wiley Blackwell, vol. 53(3-4), pages 153-169, December.
    4. Sun, Qi & Xu, Weidong, 2015. "Pricing foreign equity option with stochastic volatility," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 437(C), pages 89-100.
    5. Ulyah, Siti Maghfirotul & Lin, Xenos Chang-Shuo & Miao, Daniel Wei-Chung, 2018. "Pricing short-dated foreign equity options with a bivariate jump-diffusion model with correlated fat-tailed jumps," Finance Research Letters, Elsevier, vol. 24(C), pages 113-128.
    6. Christian Menn & Svetlozar Rachev, 2009. "Smoothly truncated stable distributions, GARCH-models, and option pricing," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 69(3), pages 411-438, July.
    7. Kim, Kyong-Hui & Yun, Sim & Kim, Nam-Ung & Ri, Ju-Hyuang, 2019. "Pricing formula for European currency option and exchange option in a generalized jump mixed fractional Brownian motion with time-varying coefficients," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 522(C), pages 215-231.
    8. Xu, Weidong & Wu, Chongfeng & Li, Hongyi, 2011. "Foreign equity option pricing under stochastic volatility model with double jumps," Economic Modelling, Elsevier, vol. 28(4), pages 1857-1863, July.
    9. Foad Shokrollahi, 2017. "Fractional delta hedging strategy for pricing currency options with transaction costs," Papers 1702.00037, arXiv.org.
    10. Foad Shokrollahi, 2016. "Subdiffusive fractional Brownian motion regime for pricing currency options under transaction costs," Papers 1612.06665, arXiv.org, revised Aug 2017.
    11. Li, Zhe & Zhang, Wei-Guo & Liu, Yong-Jun, 2018. "European quanto option pricing in presence of liquidity risk," The North American Journal of Economics and Finance, Elsevier, vol. 45(C), pages 230-244.
    12. Zhushun Yuan & Gemai Chen, 2009. "Asymptotic Normality for EMS Option Price Estimator with Continuous or Discontinuous Payoff Functions," Management Science, INFORMS, vol. 55(8), pages 1438-1450, August.
    13. Foad Shokrollahi & Adem Kılıçman & Marcin Magdziarz, 2016. "Pricing European options and currency options by time changed mixed fractional Brownian motion with transaction costs," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 3(01), pages 1-22, March.

    More about this item

    Keywords

    PRICING ; CURRENCIES ; FINANCIAL MARKET;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General

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