Research On Pricing Of RMB Foreign Exchange Option

July21,2005, the People’s Bank of China issued a notice to improve the RMB exchange rate formation mechanism reform, the decision, the U.S. dollar against the RMB exchange rate is one-off revaluation of2%since July21,2005, and implemented based on market supply and demand with reference to a basket of currencies (Mainly U.S. dollars, euros, yen, won), adjusted and managed floating exchange rate system. This opened the curtain of a second exchange rate reform, the exchange reform to give up the mechanism of the past, pegging to the dollar, with reference to a basket of currencies instead, a managed floating exchange rate system, marking China’s exchange rate to market-oriented reforms have taken an important step. The formation of the floating exchange rate system has played an important role in developing China’s interbanks foreign exchange market and in promoting the RMB exchange rate more flexible to create the conditions for developing derivatives. To further enrich the foreign exchange market transactions varieties, enterprises and banks to provide more exchange rate hedging instruments,16February2011, the State Administration of Foreign Exchange approval of the China Foreign Exchange Trading Center to conduct RMB foreign exchange options trading in the interbanks foreign exchange market organization, and publish the State Administration of Foreign Exchange on the RMB foreign exchange options trading related issues notice decided to conduct RMB foreign exchange options trading since April1,2011.In the course of the study, According the RMB exchange rate after the reform, the introduction of the RMB exchange rate Hurst index to analyze the structural characteristics of the RMB exchange rate market, and try to explain the characteristics of the exchange market, on this basis, the use of fractional Brownian motion foreign exchange option pricing model to calculate the theoretical price of options and calculation results were analyzed to provide a reference for RMB foreign exchange options pricing.The main result of this paper are:First, through the introduction of the Hurst index of the RMB exchange rate market, it’s turn out that the RMB exchange rate market has a long memory.Second, on the basis of the fractal characteristics of the RMB exchange rate market, the foreign exchange option pricing formula based on the fractional Black-Scholes model has developed to calculate the theoretical value of the RMB and foreign exchange options, and the results were analyzed and found that the price of an option and is inversely proportional to the Hurst index. For the same maturity of RMB foreign exchange call option, its value is reduced with the growth of the Hurst index, that is, the option value is inversely proportional to the Hurst index. For the same maturity of RMB foreign exchange put option, its value is reduced with the growth of the Hurst index, the option value is inversely proportional to the Hurst index. Put option price and the Hurst index inverse relationship is far more dramatic.Moreover, the calculation and analysis of the theoretical price of RMB foreign exchange options, proved that the model based on fractional Brownian motion has the same characteristics with the standard BS model, but has a low price. That means when time series have the characteristics of "long memory",it can reduce risk, especially when the spot price and the exercise price act as a time value relationship, this feature is far more dramatic.