Recovery of Foreign Interest Rates from Exchange Binary Options

M. Mitsuhiro, Y. Ota
2015 Computer Technology and Application  
One of most challenging problems from applying the Black-Scholes model to financial derivatives, is reconciling the deviation between the expected and observed values. This study derives an extension of the Black-Scholes model and recovers the real drift of binary call options from their market prices. For space-dependent real drift, we obtain stable linearization and an integral equation. We also find that using market prices of options with different strike prices enables us to identify the
more » ... rm structure of the real drift. Results demonstrate that our new approach can confirm the existence of arbitrage opportunities in a binary option transaction.
doi:10.17265/1934-7332/2015.02.004 fatcat:yvdh53fboreevfnlgxslsvyxru