RT Journal Article
SR Electronic
T1 Stochastic Alpha-Beta-Rho Hedging for Foreign Exchange Options: <em>Is It Worth the Effort?</em>
JF The Journal of Derivatives
FD Institutional Investor Journals
SP 76
OP 89
DO 10.3905/jod.2015.23.2.076
VO 23
IS 2
A1 Yifan Yang
A1 Frank J. Fabozzi
A1 Michele Leonardo Bianchi
YR 2015
UL https://pm-research.com/content/23/2/76.abstract
AB This article applies the stochastic alpha-beta-rho (SABR) model to the foreign exchange options market. The model pricing and hedging performance are tested using three years of historical data from August 2, 2010 to July 31, 2013 for the four most traded currency pairs. The results are compared to the hedging performance of the Black–Scholes model. The empirical study shows that the SABR model can fit and predict market volatility well. However, the hedging results show that the SABR model does not provide a more accurate hedge ratio than the Black–Scholes model. This finding is surprising given the well-known criticism of the Black–Scholes model.TOPICS: Options, quantitative methods, global