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http://dx.doi.org/10.5392/JKCA.2013.13.12.369

Volatilities in the Won-Dollar Exchange Markets and GARCH Option Valuation  

Han, Sang-Il (한국기술교육대학교)
Publication Information
The Journal of the Korea Contents Association / v.13, no.12, 2013 , pp. 369-378 More about this Journal
Abstract
The Korean Won-Dollar exchange markets showed radical price movements in the late 1990s and 2008. Therefore it provides good sources for studying volatility phenomena. Using the GARCH option models, I analysed how the prices of foreign exchange options react volatilities in the foreign exchange spot prices. For this I compared the explanatory power of three option models(Black and Scholes, Duan, Heston and Nandi), using the Won-Dollar OTC option markets data from 2006 to 2013. I estimated the parameters using MLE and calculated the mean square pricing errors. According to the my empirical studies, the pricing errors of Duan, Black and Scholes models are 0.1%. And the pricing errors of the Heston and Nandi model is greatest among the three models. So I would like to recommend using Duan or Black and Scholes model for hedging the foreign exchange risks. Finally, the historical average of spot volatilities is about 14%, so trading the options around 5% may lead to serious losses to sellers.
Keywords
Won-Dollar Exchange Markets; Duan(1995); Heston and Nandi(2000); Foreign Exchange Options;
Citations & Related Records
Times Cited By KSCI : 1  (Citation Analysis)
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