Trading Frequency and Implied Transaction Costs of Foreign Exchange Options

9 Pages Posted: 19 Jul 2001 Last revised: 8 Oct 2013

See all articles by Shmuel Hauser

Shmuel Hauser

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

Azriel Levy

Hebrew University of Jerusalem; Bank of Israel

Uzi Yaari

Rutgers University; School of Business-Camden

Abstract

This study explores the viability of arbitrage in determining the price of foreign exchange options when adjustments of the replicating asset portfolio are subject to transaction costs. We first develop a model for valuing those options and then use empirical data and simulation to calculate the bid-ask spread consistent with various levels of transaction costs and trading frequencies. Our findings show that the price spread implied by feasible cost and trading interval parameters is fairly narrow, indicating a role for arbitrage in that market. Our estimated low transaction costs suggest that the market for currency options is dominated by institutional investors.

Keywords: trading frequency, non-dealer security markets, price discovery, portfolio effect, return volatility

JEL Classification: F31, G15

Suggested Citation

Hauser, Shmuel and Levy, Azriel and Yaari, Uzi, Trading Frequency and Implied Transaction Costs of Foreign Exchange Options. ADVANCES IN FUTURES AND OPTIONS RESEARCH, Vol. 7, pp. 37-45, 1994, Available at SSRN: https://ssrn.com/abstract=5733

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

Azriel Levy

Hebrew University of Jerusalem ( email )

Mount Scopus
Jerusalem, Jerusalem 91905
Israel

Bank of Israel

P.O. Box 780
Jerusalem, 91907
Israel

Uzi Yaari (Contact Author)

Rutgers University ( email )

School of Business
Camden, NJ 08102
United States
610-664-2086 (Phone)

HOME PAGE: http://camden-sbc.rutgers.edu/FacultyStaff/Directory/yaari.htm

School of Business-Camden ( email )

Rutgers University
227 Penn Street
Camden, NJ 08102
United States
610-664-2086 (Phone)
610-664-2198 (Fax)

HOME PAGE: http://camden-sbc.rutgers.edu/FacultyStaff/Directory/yaari.htm

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