This paper studies the early KOSPI 200 option market concentrating on volatility. We examine several volatility forecasting instrument; historical volatility, implied volatility, and simplified GARCH model. Implied volatility shows higher level than others due to inefficient early KOSPI 200 option market.
We find option premiums are higher than the theoretical value mainly due to the Korean investors' higher expected return on stock and main buyers consisting of small individual investors.
In addition, we studies the prevailing option pricing models such as Black-Scholes Model, Cox-Ross-Rubinstein Binomial Tree Model, Gauss-Hermite Trinomial Tree Model, Implicit Finite Difference Method, Explicit Finite Difference Model, and Crank-Nicolson Finite Difference Method among other things. The Trinomial Model has its own strength than Binomial Model, and the Crank-Nicolson Methos is the most efficient model among examined numerical methods.
