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Option Pricing Beyond Black–Scholes: Modeling FX Tail Risk with GPD
This research note explores an extension of the Black–Scholes–Merton framework by incorporating
Generalized Pareto Distributions (GPD) to model extreme tail behavior in FX returns (USD/CAD).
The objective is to highlight limitations of classical lognormal assumptions in option pricing
and demonstrate how extreme value theory can improve tail risk awareness for risk management and insurance-related applications.
This work is for educational and research purposes only.