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    A COMPARISON OF THE CLASSICAL BLACK-SCHOLES MODEL AND THE GARCH OPTION PRICING MODEL FOR CURRENCY OPTIONS

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    Date
    2008
    Author
    Akinyi, Aduda Jane
    Weke, PGO
    Type
    Working Paper
    Language
    en
    Metadata
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    Abstract
    This paper looks at the consequences of introducing heteroscedasticity in option pricing. The analysis shows that introducing heteroscedasticity results in a better fitting of the empirical distribution of foreign exchange rates than in the Brownian model. In the Black-Scholes world the assumption is that the variance is constant, which is definitely not the case when looking at financial time series data. In this study we therefore price a European call option under a Garch model Framework using the Locally Risk Neutral Valuation Relationship. Option prices for different spot prices are calculated using simulations. We use the non-linear in mean Garch model in analyzing the Kenyan foreign exchange market.
    URI
    http://hdl.handle.net/11295/39417
    Publisher
    Department of Statistics and Actuarial Science; Jomo Kenyatta University of Agriculture & Technology
     
    School of Mathematics, University of Nairobi
     
    Subject
    Heteroscedasticity
    Black-Scholes
    Option pricing
    Garch model
    Foreign exchange rates
    Risk Neutral Valuation
    Collections
    • School Of Mathematics [35]

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