Modeling volatility in foreign currency option pricing

Article

Hoque, Ariful, Chan, Felix and Manzur, Meher. 2009. "Modeling volatility in foreign currency option pricing." Multinational Finance Journal. 13 (1/2), pp. 181-200.
Article Title

Modeling volatility in foreign currency option pricing

ERA Journal ID19586
Article CategoryArticle
AuthorsHoque, Ariful (Author), Chan, Felix (Author) and Manzur, Meher (Author)
Journal TitleMultinational Finance Journal
Journal Citation13 (1/2), pp. 181-200
Number of Pages20
Year2009
Place of PublicationAudubon, NJ, United States
ISSN1096-1879
Abstract

[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 those 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 reasonable accurate forecasts for put and call prices.(JEL: G12, G13)

Keywordsforeign currency options, implied volatility, optimal volatility,multiplicative error model, GARCH model
ANZSRC Field of Research 2020350202. Finance
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Byline AffiliationsCurtin University of Technology
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