Understanding Foreign Exchange Option Returns: The Information Content of Volatility

2012 ◽  
Author(s):  
Lamya Kermiche ◽  
Philippe Dupuy
Keyword(s):  
Information Content ◽  
Foreign Exchange ◽  
Option Returns ◽  
Exchange Option

Foreign Exchange Option Symmetry

10.1142/3688 ◽  
1998 ◽  
Author(s):  
Valery A Kholodnyi ◽  
John F Price
Keyword(s):  
Foreign Exchange ◽  
Exchange Option

scholarly journals Understanding Foreign Exchange Option Returns: The Information Content Of Volatility

2016 ◽  
Vol 32 (2) ◽  
pp. 439
Author(s):  
Lamya Kermiche ◽  
Philippe Dupuy
Keyword(s):  
Risk Factors ◽  
Foreign Exchange ◽  
Implied Volatility ◽  
Additional Risk ◽  
Rational Agents ◽  
Option Returns ◽  
Asset Pricing Theory ◽  
Pricing Theory ◽  
Traditional Paradigm ◽  
Exchange Options

According to general asset pricing theory, options should reward their holders for the systematic risk they are bearing. In this paper, we study the returns of foreign exchange options. We find that, by sorting options according to the distance of their implied volatility from the historical volatility, we obtain portfolios with positive average monthly returns. These returns are not explained by standard aggregate risk factors, which suggest either that additional risk factors should be accounted for, or that investors behavior differs from the traditional paradigm of rational agents.

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