The Black-Scholes Currency Option Pricing Model: Evidence for Unbiasedness from Three Currencies against the US Dollar

Samih Antoine Azar, Annie Tortian


Under risk neutrality and rational expectations, the future value of the option premium is an unbiased estimator of the future actual payoff of the option. In this paper, this unbiasedness hypothesis is tested for the Black-Scholes currency call option pricing model. Three currencies, against the US dollar, are considered: the British pound, the Swiss franc, and the Japanese yen. The data is monthly and starts from the late 1980s. A set of seven different strike prices are assumed for each currency. Unbiasedness is supported if the regression constants are statistically insignificant, and if the regression slopes are statistically insignificantly different from 1, and if there is no autocorrelation in the regression residuals. The results for the British pound are strongly supportive of this version of market option efficiency. For the other two currencies only long run cointegration relations are uncovered. The results, whether short run or long run, remain also strongly supportive when the theoretical constraints are imposed. In addition, the results are not materially different with alternative measures of currency volatility. It can be concluded that the Black-Scholes currency option pricing model is relevant not only theoretically but also empirically and practically.


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International Journal of Economics and Finance  ISSN  1916-971X (Print) ISSN  1916-9728 (Online)

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