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Pricing of European currency options considering the dynamic information costs

Author

Listed:
  • Wael Dammak

    (LSAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon, UCBL - Université Claude Bernard Lyon 1 - Université de Lyon)

  • Salah Ben Hamad

    (جامعة صفاقس - Université de Sfax - University of Sfax)

  • Christian de Peretti

    (ECL - École Centrale de Lyon - Université de Lyon, LSAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon)

  • Hichem Eleuch

    (INSAT - Institut National des Sciences Appliquées et de Technologie [Tunis] - UCAR - Université de Carthage (Tunisie) = University of Carthage)

Abstract

Dynamic costs arising from the variable impact of information on asset pricing present a challenge for accurate European currency option pricing. The Garman and Kohlhagen model, though influential in the literature, does not adequately account for these costs. This study extends the model by integrating an intensity function into the interest rates to measure dynamic information costs. Inspired by the Beer–Lambert law, the function is applied to a decade-long dataset of daily futures continuous calls on the EUR/USD pair from September 21, 2012, to September 23, 2022. The augmented model reduces pricing errors and manages implied volatility better than the 1983 model, consistent across different categories of maturity and moneyness. Our findings emphasize the need to consider dynamic information costs in asset pricing, demonstrating that their inclusion can significantly enhance the accuracy and reliability of currency option pricing.

Suggested Citation

  • Wael Dammak & Salah Ben Hamad & Christian de Peretti & Hichem Eleuch, 2023. "Pricing of European currency options considering the dynamic information costs," Post-Print hal-04875463, HAL.
    • Handle: RePEc:hal:journl:hal-04875463
    DOI: 10.1016/j.gfj.2023.100897
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    Cited by:

    1. Dammak, Wael & Frikha, Wajdi & Souissi, Mohamed Naceur, 2024. "Market turbulence and investor decision-making in currency option market," The Journal of Economic Asymmetries, Elsevier, vol. 30(C).
    2. Dammak, Wael & Boutouria, Nahla & Ben Hamad, Salah & de Peretti, Christian, 2023. "Investor behavior in the currency option market during the COVID-19 pandemic," The Journal of Economic Asymmetries, Elsevier, vol. 28(C).
    3. Wael DAMMAK, 2024. "Assessing Effect of Market Sentiment on Pricing of European Currency Options ‎," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 8(6), pages 1224-1244, June.
    4. Vipul Kumar Singh & Pawan Kumar, 2024. "Effectiveness of deterministic option pricing models: new evidence from Nifty and Bank Nifty Index options," Journal of Asset Management, Palgrave Macmillan, vol. 25(2), pages 172-189, March.
    5. Ali Trabelsi Karoui & Sonia Sayari & Wael Dammak & Ahmed Jeribi, 2024. "Unveiling Outperformance: A Portfolio Analysis of Top AI-Related Stocks against IT Indices and Robotics ETFs," Risks, MDPI, vol. 12(3), pages 1-21, March.
    6. Mellouli Dhoha & Wael Dammak & Hind Alnafisah & Ahmed Jeribi, 2024. "Dynamic spillovers between natural gas and BRICS stock markets during health and political crises," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 14(2), pages 453-485, June.

    More about this item

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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