Research On RMB Foreign Exchange Option Pricing Based On Jump Diffusion Model

With the continuous advancement of China's exchange rate reform,the flexibility of exchange rate fluctuations has been continuously enhanced,and the importance of risk management tools in the foreign exchange market has become increasingly prominent.In 2011,China officially launched RMB foreign exchange options trading.RMB foreign exchange options are an important means to avoid exchange rate risks,and the pricing of RMB foreign exchange options has also become a research focus.This paper chooses the RMB-dollar foreign exchange option as the object of pricing research.The author first introduces two main option pricing theories: partial differential equation method and martingale pricing method,and then analyzes the jump diffusion model in detail.The author believes that in the case of the volatility of the RMB exchange rate,there is a “jump” phenomenon in the exchange rate fluctuation of the RMB against the US dollar.You can try to use the jump diffusion model to price RMB foreign exchange options.Next,the author sorts out the development status of RMB foreign exchange options.This paper believes that the development of RMB foreign exchange options is becoming more and more mature,but there are still problems in pricing RMB foreign exchange options.First,the use of the GK model for option pricing underestimates the possibility of sharp fluctuations in the exchange rate,which in turn leads to an underestimation of the option price.Second,when constructing volatility surfaces,there is a problem of insufficient information and insufficient use of existing information.In the empirical part,the author first verifies that there is a “spike and thick tail” phenomenon in the exchange rate fluctuation of RMB against the US dollar,which is inconsistent with the assumption of the lognormal distribution in the GK model.Secondly,the author tests that the “jumping” phenomenon also exists in the exchange rate fluctuation of RMB against the US dollar,which provides support for pricing using the jump diffusion model.Then,the author uses the ARIMA model to estimate the implied volatility,and sets and estimates the parameters such as execution price,domestic and foreign interest rates,and jump range.After comparing the pricing results of the jump diffusion model with the pricing results of the GK model,the author believes that the jump diffusion model improves the underestimation of the volatility and option prices by the GK model.Finally,according to the research conclusions drawn in this paper,the author gives suggestions that are more suitable for the pricing of China's foreign exchange options market,and discusses the future research directions.