Valuation of Currency Options using Higher Order Moments George M. Jabbour*, Zhan M. Onayev**, Mircea V. Petrescu**, Abstract The currency exchange rates under consideration were not lognor - mally distributed for February 1989 to February 2004, violating one of the assumptions of the Black-Scholes model. We incorporate higher order moments via an Edgeworth series expansion applied directly to the probabil - ity density function. Option values and comparative statics (the “Greeks”) are computed and compared with those obtained using the Black-Scholes method. The results indicate significant differences, which has major impli - cations for hedging and risk management. The pricing difference is largest in magnitude for out-of-the money call options and at-the-money put options and varies linearly with kurtosis and nonlinearly with skewness. The “Greeks” also display considerable differences under the two pricing methodologies. When skewness and kurtosis vary simultaneously, the former dominates for both in-the-money and out-of-the money puts and calls. Key words: Exchange rates, Currency options, Black and Scholes, Non-normal, Skewness, Kurtosis. *Professor of finance at The George Washington University. ** ABD, Finance Department, The George Washington University. S S cientific Journal of Administrative Development Vol. 4 I.A.D. 2006 110