2000 UPDATED VERSION
Menachem Brenner, Rafi Eldor, Shmuel Hauser
ABSTRACT
The purpose of this paper is to examine the effect of illiquidity on the value of currency options. We use a unique
data set which allows us to explore this issue in special circumstances where options are issued by a central bank
and are not traded prior to maturity. The value of these options is compared to similar options traded on the exchange.
We find that the non-tradable options are priced about 21 percent less than the exchange traded options. This gap
cannot be arbitraged away due to transactions costs and the risk that the exchange rate will change during the
bidding process.
Subject: Investment/Derivatives
Category: Empirical
Brenner: (212) 998-0323 mbrenner@stern.nyu.edu
Eldor: eldor@idc.ac.il
Hauser: mshauser@mscc.huji.ac.il
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