Valuation of Foreign Currency Options: Some Empirical Tests

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 expost tests is inconsistent with this hypothesis since we find a large number of opportunities for abnor? mal profits. A second set of tests is conducted on an ex ante basis to determine whether these profit opportunities exist even if the execution ofthe strategy is delayed by one day. The evidence from these tests provides more support for the hypothesis of market effi? ciency.