Transactions data tests of the black model for soybean futures options

✍ Scribed by James V. Jordan; William E. Seale; Nancy C. McCabe; David E. Kenyon

• Publisher: John Wiley and Sons
• Year: 1987
• Tongue: English
• Weight: 971 KB
• Volume: 7
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.3990070507

✦ Synopsis

he Black futures option pricing model is tested on soybean futures options T using intraday transaction prices and three volatility estimation methods: historical, forecast and implied. The model performs best with implied volatility; average deviations from actual prices are one tenth of one cent per bushel for puts and four hundredths of one cent per bushel for calls. Tests for moneyness bias show that both in-and out-of-the money options are underpriced by the model. The evidence for biases related to option maturity, changing volatility and price supports is much weaker.

I. INTRODUCTION

Options on agricultural futures contracts began trading on October 31, 1984. Prior to this, options on agricultural commodities had been banned since 1936 because of a history of manipulations and customer abuses. However, the usefulness of such options for certain types of risk management which are not obtainable with futures contracts alone led to the authorization by Congress of a pilot program in 1982.

An example of risk management using options which is not available with futures is the purchase of price insurance by agricultural producers.