The valuation of foreign currency options in Kenya under stochastic volatility
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Date
2013-11Author
Kambi, Robinson M.
Type
ThesisLanguage
enMetadata
Show full item recordAbstract
The main objective of this research project is to show how foreign currency options can be
valued in Kenya under stochastic volatility and also to come up with a model for predicting
variance and volatility of exchange rates. First the research sought to develop a model for
predicting variance based on the USD and Kenya Shillings exchange rates in Kenya for a period
of five years between 2008-2012.The research also sought to show how foreign currency options
would be priced information from the available data.
This research used descriptive research design and the Garman Kohlhagen model for valuation
of foreign currency options. The research uses Garch (1, 1) model to fit the variance regression
line which was used to predict variance and subsequently the volatility that together with other
variables isplugged into the Garman Kohlhagen model. to price the foreign currency options.
The research gave findings that were consistent with research done in the area of valuation of
foreign currency options. The research shown that foreign currency options can be valued in
Kenya by use of a Garch (1, 1) framework which was a good fit for the actual data as the
coefficients of the model were within the model constraints of ( + 0.98) <1 for using Garch
(1, 1) .The research found out that for call options when the spot exchange rate is below the
strike price the option has statistically zero value and when above strike price the option has a
positive value. On the other hand the price of a put currency option is positive when the spot
exchange rate is below the strike price and statistically zero when the spot exchange rates are
above the strike prices and the further away from the strike price the spot exchange rate is the
higher the value of the option.
Citation
A Research Project Submitted In Partial Fulfillment Of The Requirement For The Award Of The Degree Of Master Of Business Administration School Of Business, University Of NairobiPublisher
University of Nairobi School of Business