Influence of transaction costs on foreign exchange option contracts: intra-daily tests (original) (raw)
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Put-call parity, transactions costs and PHLX currency options: intra-daily tests
2010
This paper tests the impact of transactions cost specification on deviations from lower boundary and put-call parity properties. Using PHLX traded foreign exchange options, prices for puts and calls are matched to the nearest five minutes. The results indicate how boundaries on the arbitrage profit function determined by alternative measures of transactions costs can impact the interpretation of deviations from distribution free properties of options such as put-call parity.
Put-Call Parity, Transaction Costs and PHLX Currency Options: Intra-daily Tests
Proceedings of the 59th Midwest Finance …, 2010
This paper tests the impact of transactions cost specification on deviations from lower boundary and put-call parity properties. Using PHLX traded foreign exchange options, prices for puts and calls are matched to the nearest five minutes. The results indicate how boundaries on the ...
2015
Due to the mispricing of options, no-arbitrage condition put-call parity (PCP) violations lead to inefficiency in the currency options market. Through transaction costs, the effects of these violations are reduced to negligible levels, indicating that PCP is not a sufficient condition for an options market efficiency test. Thus, this study developed a transaction cost-adjusted put-call parity (TC-Adj-PCP) econometric model to examine the efficiency of options markets. The fundamental analysis of the proposed model concludes that transaction costs represent an omitted variable for the PCP model, where the uniqueness of this variable is demonstrated under PCP in the context of options market efficiency. The novelty of the TC-Adj-PCP model resolves controversial transaction costs issues for traders and researchers.
Efficiency of the foreign currency options market
Global Finance Journal, 2008
This paper provides a new test of the efficiency of the currency option markets for four major currencies-British Pound, Euro, Swiss Frank and Japanese Yen vis-à-vis the U.S. dollar. The approach is to simulate trading strategies to see if the well-accepted no arbitrage condition of put-call parity (PCP) holds in a trading environment. Augmented Dickey-Fuller and Philips-Perron tests are used to check for the presence of unit roots in the data, followed by a formal econometric analysis. The results indicate that the most currency option prices do not violate the PCP conditions, when transaction costs are allowed for.
1 Efficiency of the Foreign Currency Options Market * by
2009
This paper provides a new test of the efficiency of the currency option markets for four major currencies – British Pound, Euro, Swiss Frank and Japanese Yen vis-à-vis the U.S. dollar. The approach is to simulate trading strategies to see if the well-accepted no arbitrage condition of put-call parity (PCP) holds in a trading environment. Augmented Dickey-Fuller and PhilipsPerron tests are used to check for the presence of unit roots in the data, followed by a formal econometric analysis. The results indicate that the most currency option prices do not violate the PCP conditions, when transaction costs are allowed for.
Canadian Journal of Administrative Sciences / Revue Canadienne des Sciences de l'Administration, 2009
7% paper presents and compares three call option valuation models for stocks without dividends in the presence of transaction costs. It then examines the ability of these modeh to predict the option bidlask spread on the SOFFEX over three dflerent time intervah prior to option expiration. None of the models appears consistently better or worse than the others according to the chosen accuracy criteria. f i e models ' bidlask spreads are not very d@ierent from those observed in the market, even though all models predict a bid price that is on average higher than the one observed in the market. Even though this can be partly explained by the estimation method, the bias is consistent with the hypothesis that market makers on the SOFFEX seek to establish perf ctly -hedged positions.
Transaction costs and option prices
Risk and Decision Analysis, 2017
Option prices are characterized by wide bid-ask spreads, much wider than the spreads of their underlying assets. This note discusses the various attempts to rationalize and link the two markets' spreads with each other and explains why their failures are mainly due to the inability to accommodate trading frictions in theoretical asset pricing models. It also presents in summary form the partial results from the stochastic dominance approach to option pricing under proportional transaction costs that provide bounds for the spreads for index call options.
An Empirical Test of Efficiency of Exchange-Traded Currency Options in India
Business and Economics Research Journal, 2015
The objective of this paper is to examine efficiency of the exchange-traded currency options market in India. Put-call-futures parity for the USD-INR currency options is studied by analyzing daily closing prices of options and futures for thirty two months on the National Stock Exchange. The study reveals frequent violations of the put-call-futures parity creating significant arbitrage opportunities. The pattern of mispricing varies when examined for time to maturity, option moneyness, liquidity and volatility of the underlying asset. These observations are consistent with those of studies of other young markets.
The Empirical Performance of Option-Based Densities of Foreign Exchange
SSRN Electronic Journal, 2000
In this paper, we calculate risk-neutral densities (RND) by estimating the daily diffusion process of the underlying futures contract for foreign exchange, based on the price of the American puts and calls reported on the Chicago Mercantile Exchange for the end of the day. Our quick and accurate method of calculating the prices of the American options uses higher-order lattices and smoothing of the option's value function at the boundaries to mitigate the nondifferentiability of the payoff boundary at expiration and the early exercise boundary. We estimate the diffusion process by minimizing the squared distance between the calculated prices and the observed prices in the data. We also test whether the densities provided from American options provide a good forecasting tool. We use a nonparametric test of the densities that depends on inverse probabilities. We modify the test to compensate for an inherent problem that arises from the time-series nature of the transformed variables when the forecasting windows overlap. We find that the densities based on the American option prices for foreign exchange do considerably well for the longer time horizons.