Implied Volatility Estimating Currency Options Price

Abstract

This chapter conducts empirical analysis in two steps for testing hypothesis 10–18 through the methodology developed in Chap. 3. First, calculate the call options model price (CMOD) and put options model price (PMOD) using the ATM 1-, 2-, and 3-month maturity IV obtained during the opening, midday, and closing period of a trading day as input for BS options pricing model. Second, estimate the options model pricing error by comparing the CMOD and PMOD with the call and put options market price, respectively, to evaluate the performance of IV for pricing currency options accurately, for the within-week, 1-week, and 1-month estimate horizon. Further, the within-week estimate horizon indicates that the IV is estimated 1–4 days before the date of pricing currency options. Similarly, the 1-week and 1-month estimate horizon imply that the IV is estimated 1-week and 1-month before the date of pricing currency options, respectively. The findings indicated that the 2-month maturity IV from early of a week (Monday or Tuesday) and 1-month maturity IV from later of a week (Thursday) in the closing trading period contain relevant information to calculate the value of currency options for the within-week estimate horizon. The 1-month maturity IV from early of a week (Monday or Tuesday) in the closing trading period holds appropriate information to price currency options price for the 1-week estimate horizon. The 2-month maturity IV from early of a week (Monday or Tuesday) in the closing trading period subsumes vital information to compute the value of currency options for the 1-month estimate horizon.