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The Pricing of SPI Futures Options with Daily Futures Style Margin Payments

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  • Garry Twite

    (Australian Graduate School of Management, The University of New South Wales, Sydney NSW 2052; E-mail: gtwite@agsm unsw edu.au)

Abstract

Empirical evidence on the pricing behaviour of options on index futures contracts traded on USA and UK futures markets reveals that pricing errors and implied volatility estimates differ systematically across exercise price and time to maturity. The introduction on 17 June 1985 of options on share price index futures contracts on the Sydney Futures Exchange, presents the opportunity to examine the pricing of pure futures options, that is, options with daily futures style margin payments. This paper examines the pricing of SPI futures options The results reveal that the pricing of SPI futures options is not well described by a pure futures option pricing model derived under the assumptions of frictionless markets and non-stochastic interest rates. The model underprices both call and put options. Further, implied volatility increases as the option becomes more in/out-of-the-money.

Suggested Citation

  • Garry Twite, 1996. "The Pricing of SPI Futures Options with Daily Futures Style Margin Payments," Australian Journal of Management, Australian School of Business, vol. 21(2), pages 139-157, December.
    • Handle: RePEc:sae:ausman:v:21:y:1996:i:2:p:139-157
    DOI: 10.1177/031289629602100203
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    References listed on IDEAS

    as
    1. Whaley, Robert E, 1986. "Valuation of American Futures Options: Theory and Empirical Tests," Journal of Finance, American Finance Association, vol. 41(1), pages 127-150, March.
    2. Bernard Dumas & Jeff Fleming & Robert E. Whaley, 1996. "Implied Volatility Functions: Empirical Tests," Working Papers hal-00606071, HAL.
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    Cited by:

    1. George W. Kutner & David C. Porter & John G. Thatcher, 2001. "The Proposed Introduction Of Futures-Style Margining In The United States: An Australian Comparison," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 24(2), pages 239-259, June.
    2. Timothy Sharp & Steven Li & David Allen, 2010. "Empirical performance of affine option pricing models: evidence from the Australian index options market," Applied Financial Economics, Taylor & Francis Journals, vol. 20(6), pages 501-514.
    3. Robert E.J. Hibbard & Rob Brown & Keith R. McLaren, 2002. "Nonsimultaneity and Futures Option Pricing: Simulation and Empirical Evidence," Monash Econometrics and Business Statistics Working Papers 13/02, Monash University, Department of Econometrics and Business Statistics.

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