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    Modeling volatility in foreign currency option pricing

    20672_downloaded_stream_128.pdf (379.2Kb)
    Access Status
    Open access
    Authors
    Hoque, Mohammed
    Chan, Felix
    Manzur, Meher
    Date
    2008
    Type
    Working Paper
    
    Metadata
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    Citation
    Hoque, Mohammed and Chan, Felix and Manzur, Meher (2008) Modeling volatility in foreign currency option pricing, School of Economics and Finance Working Papers Series: no. 08:09, Curtin University of Technology, School of Economics and Finance.
    Faculty
    Curtin Business School
    School of Economics and Finance
    URI
    http://hdl.handle.net/20.500.11937/10204
    Collection
    • Curtin Research Publications
    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 the forecast performance 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 reasonably accurate forecasts for put and call prices.

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