This dissertation empirically tests two valuation models for call currency options: (1) an extant adaptation of the Black-Scholes-Merton option pricing model applicable to underlying securities with price relatives described by geometric Brownian motion such that return variance is time invariant, and (2) an adaptation (developed herein) of the Cox-Ross/Emanuel-MacBeth option pricing model applicable to underlying securities with price relatives described by a constant elasticity of variance diffusion process such that return variance is time variant. Tests are conducted on an ex-ante basis to determine which model more accurately predicts observed currency option prices. Transactions data supplied by the Philadelphia Stock Exchange are utilized in these tests. / This dissertation consists of two essays. The first essay investigates the diffusion process characterizing daily exchange rate changes and demonstrates that currency return variances depend on exchange rate levels and that the dependency is intertemporally unstable. This finding suggests that the usefulness of the two candidate models is an empirical issue. The second essay investigates the relative pricing performance of the two models and demonstrates that the more general CEV model does not improve pricing accuracy for predictive intervals as short as five trading days. Intertemporal instability of the elasticity coefficients relating currency return variances and exchange rate levels could account for these pricing results. Essentially, return variances are, at best, only partially predicted by a constant elasticity of variance diffusion process. Hence, the development of a more accurate currency option valuation model appears to necessitate the use of a more general and complex diffusion process of the non-stationary Ito type. / Source: Dissertation Abstracts International, Volume: 47-07, Section: A, page: 2686. / Thesis (Ph.D.)--The Florida State University, 1986.
| Identifer | oai:union.ndltd.org:fsu.edu/oai:fsu.digital.flvc.org:fsu_75866 |
| Contributors | TUCKER, ALAN LAWRENCE., Florida State University |
| Source Sets | Florida State University |
| Detected Language | English |
| Type | Text |
| Format | 97 p. |
| Rights | On campus use only. |
| Relation | Dissertation Abstracts International |
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