TEST OF MARKET EFFICIENCY OF GOLD OPTION PRICING BASED ON PUT-CALL PARITY MODEL

Abstract

Gold option trading, compared with trading in stocks and shares, is a relatively new phenomenon in Singapore. It was introduced to Singapore by two local banks only in late 1985. Therefore, unlike the local stock market, there has been very little academic research done on gold option trading in Singapore. The purpose of this study is to throw some light on the efficiency of the gold option market in Singapore. In particular, it sets out to establish whether the pricing of gold options which are offered locally conforms to theoretical option valuation. Using the put-call-futures parity model, long and short hedges were constructed from data obtained from a local Bank and a commodity broking firm. The data represents contemporaneous futures, put and call option prices subsisting in the local markets. Both ex post and ex ante sampling were carried out and with the aid of non-parametric statistical procedures, tests were conducted to determine whether the put or call prices offered by the Bank deviate substantially from the theoretical parity prices. The study also concludes whether opportunity exists for investors to set up riskless arbitrage position and earn more than the risk-free rate of return.