The Price of Options Illiquidity

32 Pages Posted: 11 Nov 2008

See all articles by Menachem Brenner

Menachem Brenner

New York University (NYU) - Department of Finance

Rafi Eldor

affiliation not provided to SSRN

Shmuel Hauser

Ben-Gurion University of the Negev - School of Management; Government of the State of Israel - Israel Securities Authority

Multiple version iconThere are 2 versions of this paper

Date Written: 2000

Abstract

The purpose of this paper is to examine the effect of illiquidity on the value of currency options. We use a unique data set which allows us to explore this issue in special circumstances where options are issued by a central bank and are not traded prior to maturity. The value of these options is compared to similar options traded on the exchange. We find that the non-tradable options are priced about 21 percent less than the exchange traded options. This gap cannot be arbitraged away due to transactions costs and the risk that the exchange rate will change during the bidding process.

Suggested Citation

Brenner, Menachem and Eldor, Rafi and Hauser, Shmuel, The Price of Options Illiquidity (2000). NYU Working Paper No. FIN-99-086, Available at SSRN: https://ssrn.com/abstract=1299458

Menachem Brenner (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0323 (Phone)
212-995-4233 (Fax)

Rafi Eldor

affiliation not provided to SSRN

No Address Available

Shmuel Hauser

Ben-Gurion University of the Negev - School of Management ( email )

P.O. Box 653
Beer-Sheva 84105
Israel
+972 2 651 3939 (Phone)
+972 7 6472896 (Fax)

Government of the State of Israel - Israel Securities Authority

22 Kanfei Nesharim Street
Jerusalem 95464
Israel

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