Asia-Pacific Currency Options Pricing Analysis

Abstract

During the Global Financial Crisis (GFC), the Asia-Pacific currencies, the Australian dollar (AUD) and the Japanese yen (JPY), behaved differently. The AUD depreciated and the JPY appreciated by 30% and 17%, respectively, against the US dollar. This contradictory price movement increased the demand for AUD and JPY options for use as speculations and hedging tools. This was a concern for the participants in the foreign exchange (FX) market, specifically for hedgers, who suffer financial losses when options are mispriced. This study, therefore, examines the post GFC Asia-Pacific currency options market efficiency to ensure that the AUD and JPY options are priced accurately. We develop a new econometric method with the idea that the call and put hold the price where it should be if their price difference is equal to the return from their moneyness. The overall test results suggest that, on average, the Asia-Pacific currency options market is efficient, thus suggesting that the underlying AUD and JPY currency markets are relatively stable. Our findings imply that European investors consider the AUD and JPY as safe-haven currencies in the post GFC European debt crisis period.