The Pricing Of Foreign Exchange Options And Some Empirical Researches

After the collapse of the Breton-Woods system, the world moved into a floating exchange rate regime. Driving by the needs to manage the volatile exchange rate risk, financial innovations flourished in the market. As one of the nova derivatives, foreign exchange options have been an essential instrument for hedging and investing in financial markets since 1970s.On July 21, 2005, China abandoned the 11-year-old peg of its currency, at 8.28, to the dollar. The yuan will be linked to a basket of currencies such as the US dollar, the Euro and the Yen. And the currency has been revalued: the yuan's central rate against the dollar was shifted by 2.1%, to 8.11.As China's foreign exchange reform is gradually moving into a floating exchange rate regime based on market supplies and demands, the yuan's exchange rate risk will be a new challenge for all Chinese enterprises. It can be foreseen that measuring and hedging of the RMB exchange rate risk will be a daily coursework for every entrepreneur operating in china within the next decade. As an effective instrument for risk management, foreign exchange options, along with other derivative products, will experience a rapid development in china.With the dramatic increase of the foreign exchange deposits, over 80 billion U.S. dollars specifically, the Chinese households are not satisfied with the traditional financial products, i.e. the ultra low interest rates foreign exchange deposits, the awfully stagnant domestic stocks and the extremely volatile foreign exchanges ,any more and are thirsty for new investment opportunities.In 2002, Bank of China launched a set of brand new products, which are a simple sort of foreign exchange options, named LIANDEBAO and QIQUANBAO respectively, targeting for the domestic retail market. It was a smash hit.This dissertation firstly introduces the classic Balck-Scholes model for European style options and the binomial tree pricing model for American style options. Then, it deduces out the European style foreign exchange options pricing model as well as America style foreign exchange options pricing model, by carefully considering the variables affecting the prices of foreign exchange options. After that, taking the LIANDEBAO and QIQUANBAO products as the empirical research objects, it...