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

Marc Chesney and Louis Scott

Journal of Financial and Quantitative Analysis, 1989, vol. 24, issue 3, 267-284

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.

Date: 1989
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