Garman-Kohlhagen Option Pricing Model

Use the Garman-Kohlhagen pricing model to determine the value of currency options

Because of the complicated nature of the currency pricing market, a business should use financial modeling to determine the correct price for these options, which is where the Garman-Kohlhagen option pricing model comes in. While you can use this model to determine most types of option pricing, historical performance dictates that Garman-Kohlhagen option pricing is best when used to price foreign currency options. If your business decides to invest in or issue foreign currency options, the Garman-Kohlhagen option formula is an integral tool to determine the correct pricing structure.

The Garman-Kohlhagen pricing option model is a derivation on the Black Scholes model, but with Garman-Kohlhagen option pricing there are separate conditions for foreign and domestic currency pricing. Because of this difference in the currency option pricing models, Garman-Kohlhagen is preferable to any other model if the currency is from outside the US. Before you choose to use this pricing model to value your currency options, there are few items to consider:

1. Understand the basic theories and mathematics behind the Garman-Kohlhagen options model.

2. Attend classes on the Garman-Kohlhagen option pricing model.

3. Employ the services of a option pricing model consultant.

Evaluate the fundamental aspects of the Garman-Kohlhagen option formula

To understand how anything works, a person must examine the basic structure of the underlying process. With the Garman-Kohlhagen option pricing model, it is difficult to grasp every nuance of the model but most people can interpret the model as a whole given sufficient background information.

Enroll in option pricing courses or seminars

Rather than trying to understand the full width and breadth of option pricing on your own, it is often easier to pay others to explain the concepts. If this model is the your only reason for enrolling in these classes, it may not be worth the time and effort. However, if you want a larger view of the options market then these classes may be worth the money.

Hire a options pricing consultant

Because of the complicated nature of option pricing models, you may need to consult with option pricing professionals that can make this process much easier. It may be that this model is not the best fit for your business needs.

• You should understand all of the risks involved before spending hard-earned assets on any financial vehicle. While the Garman-Kohlhagen option pricing model helps alleviate some of this risk in currency option trading, there is still significant risk to your investment.

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