Contemporary Challenges to the Assessment of European-Style Currency Options

Authors:

Pages: 65-72

Abstract:

The article draws attention to the development of an algorithm for calculating the theoretical value of European-style currency options. It demonstrates the application of three models for assessing currency options: the Garman-Kohlhagen model (1983), the Biger-Hull model (1983), and the Grabbe model (1983). The results of the evaluation of the European currency option contracts are compared with the real option premium, and, for this purpose, a specialized set of statistical indicators has been applied. In line with this, we determine how much the currency options at the time of evaluation are undervalued or overvalued, which is a prerequisite for making rational investment decisions. From a practical point of view, the author attempts to empirically establish the success rate of the models as adequate tools for evaluating European-style currency options.

Keywords:

financial derivatives; currency options; call option evaluation; put option evaluation.

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