A Study On The Pricing Of RMB Foreign Exchange Options

Option pricing has long been the focus of research in finance and financial engineering.The emergence of the B-S model in the 1970s laid a solid mathematical foundation for pricing options and financial derivatives.Since then,options pricing and trading strategies based on mathematical models have emerged in endlessly.However,as the world's largest financial classified market,there is little attention on the currency option market or said as the foreign exchange option market and other related derivatives market in the foreign exchange market.In fact,the volume of foreign exchange options trading is quite large and shows a rapid growth momentum.With the opening of CBY foreign exchange options trading in China in 2011,more attention should be paid to the study of this field.Traditional foreign exchange option pricing models,such as the Garman-Kohlhagen formula under the B-S framework,often suffer from the poor pricing accuracy in the market because of the rigorous and idealized assumptions.A large number of financial practices also showed that there are serious deviations between the B-S model pricing and the reality.This is also confirmed in the empirical part of Chapter 6 of this paper.In the case of pricing deviation,many basic options trading strategies fail,and the cost of hedging will be much higher than theoretical expectations.Therefore,it is of great practical significance to study the pricing of foreign exchange options.This paper is mainly devoted to discussing the pricing efficiency of foreign exchange options and hedging strategy based on pricing formula under the framework of B-S model.This paper will relax the assumption of risk-free interest rate and volatility of the Garman-Kohlhagen formula,which is a special case of B-S model under foreign exchange options,and revise the Garman-Kohlhagen formula to make it more suitable for the foreign exchange options market of RMB.Then test the effect of the revised formula and compares the hedging methods on the basis of the old and new pricing formulas.The main work of this paper is as follows:(1)This paper introduces options and foreign exchange options,as well as the derivation of B-S partial differential equation and European option pricing formula in classical sense,and gives the Garman-Kohlhagen formula for foreign exchange options market.(2)This paper analyses the irrationality of risk-free interest rate and volatility in the original hypothesis,and gives the pricing formula of foreign exchange options under the substitution hypothesis.(3)Taking 300 consecutive trading days in CNY foreign exchange option market as samples,this paper compares the pricing efficiency of the new pricing formula and the Garman-Kohlhagen formula,and draws a conclusion that the new pricing formula is more efficient in the special market environment.(4)Based on the common sensitive indicators,this paper makes a comparative analysis of the common hedging strategies of foreign exchange options,and provides simple guidance for the current trading strategies of RMB foreign exchange options market.