Abstract
The purpose of this paper is to evaluate the value of Euro FX options (EC) which is available at CME Group exchanges by combining the option pricing theory with practical trading strategy. By using Least-Squares Method (LSM) of Longstaff and Schwartz (2001) to estimate its early exercising value and using EGARCH model to estimate its volatility, we then combines LSM algorithm with the gain-loss ratio of Bernardo and Ledoit (2000) to create the trading strategies. Then we compare the pricing bounds with real trading prices to find existence of semi-arbitrage opportunities. The empirical results show that the higher the gain-loss ratio we set, the wider the option bounds we get. The wider pricing bounds lower trading frequency, but decrease the numbers of extreme loss. Meanwhile, using higher frequency data to estimate volatilities would reduce the risk and increase the trading performance; the trading strategies perform better on the back month Euro FX options than the front month Euro FX options.