An Empirical Test of Efficiency of Exchange-traded Currency Options in India

Abstract

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, moneyness of strike, liquidity and volatility of the underlying. These observations are consistent with those of studies of other young markets