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Evaluating Pricing Models for Options on Futures

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  • Robert J. Hauser
  • Yue Liu

Abstract

Riskless hedging simulations are used to evaluate the performance of alternative models for pricing options on cattle futures and to identify efficiency characteristics of the options market. Seven option contracts are examined. Mispriced contracts and resulting portfolios were evaluated daily using Black's model under five different assumptions about how the price-variance forecast is derived. The results suggest that economic profits are possible if "good" short-term forecasts of variance are available. However, the ex-ante estimates of variance used did not consistently identify arbitrage opportunities. Thus, in general, inefficiency within the live-cattle options market was not indicated. Finally, the findings suggest that researchers and practitioners should focus more on short-term variances or variance rates than on variances of prices over the option's life.

Suggested Citation

  • Robert J. Hauser & Yue Liu, 1992. "Evaluating Pricing Models for Options on Futures," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 14(1), pages 23-32.
    • Handle: RePEc:oup:revage:v:14:y:1992:i:1:p:23-32.
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    File URL: http://hdl.handle.net/10.2307/1349604
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    Cited by:

    1. N'zue Fofana & B. Wade Brorsen, 2001. "GARCH option pricing with implied volatility," Applied Economics Letters, Taylor & Francis Journals, vol. 8(5), pages 335-340.
    2. Novak, Frank S. & Viney, Bruce, 1995. "Alternative Pricing and Delivery Strategies for Alberta Cattle Feeders," Project Report Series 24044, University of Alberta, Department of Resource Economics and Environmental Sociology.

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