Implied volatilities, stochastic interest rates, and currency futures options valuation: an empirical investigation

Vivek Bhargava, Robert Brooks () and D. K. Malhotra

The European Journal of Finance, 2001, vol. 7, issue 3, 231-246

Abstract: Different models of pricing currency call and put options on futures are empirically tested. Option prices are determined using different models and compared to actual market prices. Option prices are determined using historical as well as implied volatility. The different models tested include both constant and stochastic interest rate models. To determine if the model prices are different from the market prices, regression analysis and paired t-tests are performed. To see which model misprices the least, root mean square errors are determined. It is found that better results are obtained when implied volatility is used. Stochastic interest rate models perform better than constant interest rate models.

Keywords: Currency Options Implied Volatility Stochastic Interest Rates Currency Futures Options (search for similar items in EconPapers)
Date: 2001
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DOI: 10.1080/13518470121944

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