Currency option pricing and realised volatility
Access Status
Open access
Authors
Manzur, Meher
Hoque, A.
Poitras, G.
Date
2010Type
Journal Article
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Manzur, Meher and Hoque, Ariful and Poitras, Geoff. 2010. Currency option pricing and realised volatility. Banking and Finance Review. 2 (1): pp. 73-86.
Source Title
Banking and Finance Review
ISSN
School
School of Economics and Finance
Collection
Abstract
Volatility is a key parameter in currency option pricing. This paper examines alternative specifications ofthe volatility input to the Black-Scholes option pricing procedure. The focus is the relative performance ofimplied, realized, and GARCH-based models as predictors of market volatility to forecast currency optionsprices. Using exchange-traded, daily and intra-daily data for three major European currencies, the results indicate that the realized volatility model tends to outperform the other two specifications, both in-sample and out-of-sample. This result is intuitively appealing and expected to facilitate resolution of other problems in risk management applications.
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