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Efficiency of the foreign currency options market

Hoque, A.ORCID: 0000-0001-8369-6653, Chan, F. and Manzur, M. (2008) Efficiency of the foreign currency options market. Global Finance Journal, 19 (2). pp. 157-170.

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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.

Item Type: Journal Article
Publisher: Elsevier
Copyright: Elsevier
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