Currency option pricing and realized volatility

Article

Manzur, Meher, Hoque, Ariful and Poitras, Geoffrey. 2010. "Currency option pricing and realized volatility." Banking and Finance Review. 2 (1), pp. 73-86.
Article Title

Currency option pricing and realized volatility

Article CategoryArticle
AuthorsManzur, Meher (Author), Hoque, Ariful (Author) and Poitras, Geoffrey (Author)
Journal TitleBanking and Finance Review
Journal Citation2 (1), pp. 73-86
Number of Pages14
Year2010
Place of PublicationNew Britain, CT
Web Address (URL)http://www.bankingandfinancereview.com/ojs/index.php/bfr/article/view/77
Abstract

Volatility is a key parameter in currency option pricing. This paper examines alternative specifications of the volatility input to the Black-Scholes option pricing procedure. The focus is the relative performance of implied, realized, and GARCH-based models as predictors of market volatility to forecast currency options prices. 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.

KeywordsEuropean options; implied volatility; realized volatility; exchange-traded; synchronicity
ANZSRC Field of Research 2020350202. Finance
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Byline AffiliationsCurtin University of Technology
School of Accounting, Economics and Finance
Simon Fraser University, Canada
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