Valuation of Foreign Currency Options: Some Empirical Tests

This paper investigates the efficiency of the market for foreign currency options with the help of a modified version of the Black-Scholes model. The evidence in the <italic>ex post</italic> tests is inconsistent with this hypothesis since we find a large number of opportunities for abnormal profits. A second set of tests is conducted on an <italic>ex ante</italic> basis to determine whether these profit opportunities exist even if the execution of the strategy is delayed by one day. The evidence from these tests provides more support for the hypothesis of market efficiency.