Information Shares of Two Parallel Currency Options Markets: Trading Costs versus Transparency/Tradability

Abstract Conventional estimates of the costs of taking liquidity in options markets are large. Nonetheless, options trading volume is high. We resolve this puzzle by showing that options price changes are predictable at high frequency, and many traders time executions by buying (selling) when the option fair value is close to the ask (bid). Effective spreads of traders who time executions are less than 40% of the size of conventional measures, and the overall average effective spread is one-quarter smaller than conventional estimates. Price impact measures are also affected. These findings alter conclusions about the after-cost profitability of options trading strategies.

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Chapter 6: Currency Options and Options Markets

Multinational Finance ◽

10.1002/9781119219729.ch6 ◽

2016 ◽

pp. 117-142

Keyword(s):

Options Markets ◽

Currency Options

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Margin Requirements and Hedging Effectiveness: An Analysis in a Risk-Return Framework

Journal of Accounting Auditing & Finance ◽

10.1177/0148558x9200700311 ◽

1992 ◽

Vol 7 (3) ◽

pp. 379-393

Author(s):

Latha Shanker

Keyword(s):

Options Markets ◽

Currency Options ◽

Margin Requirements ◽

Risk Return ◽

Hedging Effectiveness ◽

Margin Requirement ◽

The Creation ◽

Futures And Options

The wave of innovation that swept the field of finance in the last fifteen years has resulted in the creation of different instruments that could serve effectively as substitutes in performing different functions. One important function, that of hedging risk, may be performed by futures and options. The regulations of the markets in which these instruments trade are important determinants of the competitiveness of the different substitutes. One such important regulation is that of the margin requirement of futures and options markets. This paper studies the effect of an increase in the margin requirement on the hedging effectiveness of the hedging instrument and its demand by the hedger. Empirically, the paper compares the hedging effectiveness of currency options and futures with and without margin inclusion. The results indicate that margin regulations for these two instruments are such that the instruments are competitive in terms of what they offer the hedger.

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