Pricing Forward Start Option ─ Cases of Euro and Japanese Yen

• Main Authors: Li-Ching Chang, 張麗卿
• Other Authors: Wei-Shan Hu
• Format: Others
• Language: zh-TW
• Published: 2003
• Online Access: http://ndltd.ncl.edu.tw/handle/32434689591419037386

碩士 === 中原大學 === 企業管理研究所 === 91 === Abstract The purpose of this study is to pricing forward start option by using binomial and trinomial model as well as to compare these two models. Furthermore, this work explores the change of parameters on value of start option by adjusting the value of parameters. The targets of this investigation were Euro and Japanese Yen. The conclusions are summarized as follows: 1. Under both binomial and trinomial models, this study indicated that as N value increased, the value of these two models were stable and converge. It showed that both models are appropriate for pricing European-style forward start option. 2. Although trinomial model consumes a lot of time, yet the results demonstrated that it may converge even it did not have a large N value. However, the binomial model converges as N value increased. These results implied that or the trinomial model is better than the binomial model for pricing European-style forward start option in stability and efficiency. 3. According to the empirical results of sensitivity analysis, this work found that the change of parameters has significant influence on call option value for pricing European-style forward start option in both binomial and trinomial models. Additionally, the European-type forward start call option price had a positive correlation with spot exchange rate, the time to maturity, the domestic risk-free rate and volatility for both Euro and Japanese Yen. It indicates that as the parameters’ values increases, the forward start call option value will increase. The results also demonstrated that the European-type forward start call option price had negative correlation with (1) the length of the effective period; and (2) the international risk free rate. Looking into the future, we will face against a tiny-profit financial market, the exchange rate and interest rate will be more flexible than before. Various derivative products of forward start option will be introduced into Taiwan’s financial markets, in order to meet the needs of customers. Finally, this work provides the suggestions and recommendations to investors and organizations.