A Study on the Behavior of the USD/KRW Currency Option Volatility : Gram-Charlier binomial Approach

This preliminary paper attempts to explain the behavior of implied volatility in the $/\ currency option market by focusing on the volatility smile phenomenon through the use of the binomial tree method. The empirical findings are as follows: (1) the out of the money put option has higher implied volatilities than the in the money put option does. (2) the KRW reveals fatter tails compared with the tails under a logarithmic normal distribution. The implication of the result is that skewness and kurtosis-adjusted Gram-Charlier expansion method formula yields significantly improved pricing accuracy and consistency for pricing deep in-the money and deep out-of-money option.