Currency Option Pricing Using Binomial Trees

Student: Shepeleva Irina

Educational Programme: Bachelor

Year of Graduation: 2014

This study examines the approaches to the currency American and European option valuation assuming that the underlying exhibits GARCH-type process. We propose the usage of the Cox-Ross-Rubinstein, Edgeworth and Johnson binomial trees as well as the Ritchken-Trevor trinomial tree in order to obtain arbitrage-free prices of currency cross-rate options and compare them with the quotes from the Chicago Mercantile Exchange. By empirically analyzing the pricing performance, we demonstrate that the crucial factor in the pricing is the volatility of the underlying asset.

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