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Pricing European Currency Options: A Comparison of the Modified Black-Scholes Model and a Random Variance Model

Published online by Cambridge University Press:  06 April 2009

Marc Chesney  and
Louis Scott
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Abstract

We use the modified Black-Scholes model and a random variance option pricing model to study prices of European currency options traded in Geneva. The options, which cannot be exercised early, include calls and puts on the dollar/Swiss franc exchange rate. In the empirical analysis, we examine the model fit and the biases with respect to the strike price, time to maturity, and volatility. There is some evidence of mispricing and there are small gains available by trading with the random variance model.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 24 , Issue 3 , September 1989 , pp. 267 - 284
Copyright
Copyright © School of Business Administration, University of Washington 1989

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