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

원-달러 변동성 및 옵션 모형의 설명력에 대한 고찰

  • Received : 2013.11.21
  • Accepted : 2013.12.03
  • Published : 2013.12.28

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

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