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Valuation of Foreign Currency Options: Some Empirical Tests

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Author Info
Shastri, Kuldeep
Tandon, Kishore
Abstract

This paper investigates the efficiency of the market for foreign currency options with the help of a modified version of the Black-Scholes model. The evidence in the ex post tests is inconsistent with this hypothesis since we find a large number of opportunities for abnormal profits. A second set of tests is conducted on an ex ante basis to determine whether these profit opportunities exist even if the execution of the strategy is delayed by one day. The evidence from these tests provides more support for the hypothesis of market efficiency.

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Publisher Info
Article provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.

Volume (Year): 21 (1986)
Issue (Month): 02 (June)
Pages: 145-160
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Handle: RePEc:cup:jfinqa:v:21:y:1986:i:02:p:145-160_01

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  1. Christopher J. Neely, 2004. "Forecasting foreign exchange volatility: why is implied volatility biased and inefficient? and does it matter?," Working Papers 2002-017, Federal Reserve Bank of St. Louis. [Downloadable!]
    Other versions:
  2. Ulibarri, Carlos A. & Anselmo, Peter & Hovsepian, Karen & Florescu, Ionut & Tolk, Jacob, 2008. "'Noise trader risk' and Bayesian market making in FX derivatives: rolling loaded dice?," MPRA Paper 14814, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  3. Kleopatra Nikolaou & Lucio Sarno, 2005. "New Evidence on the Forward Unbiasedness Hypothesis in the Foreign Exchange Market," Money Macro and Finance (MMF) Research Group Conference 2005 77, Money Macro and Finance Research Group. [Downloadable!]
  4. Vivek Bhargava, Robert Brooks, D.K. Malhotra, 2001. "Implied volatilities, stochastic interest rates, and currency futures options valuation: an empirical investigation," European Journal of Finance, Taylor and Francis Journals, vol. 7(3), pages 231-246, September. [Downloadable!] (restricted)
  5. Richard K. Lyons, 1986. "Tests of the foreign exchange risk premium using the expected second moments implied by option pricing," International Finance Discussion Papers 290, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
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