A comparison of the classical black-scholes model and the Garch option pricing model for currency options.
Abstract
This study 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 BlackScholes
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.
Citation
M.Sc (Actuarial Science)Sponsorhip
University of NairobiPublisher
School of Mathematics, University of Nairobi
Description
Master of Science Thesis