An Empirical Investigation of the Market for Comex Gold Futures Options

  • Author(s): WARREN BAILEY
  • Published: Apr 30, 2012
  • Pages: 1187-1194
  • DOI: 10.1111/j.1540-6261.1987.tb04360.x


Option‐pricing models that assume a constant interest rate may misprice futures options if the interest rate fluctuates significantly or if the price of the underlying asset is correlated with the interest rate. The futures option‐pricing model of Ramaswamy and Sundaresan allows for a stochastic interest rate and correlation of the underlying asset's price with the interest rate. Using a data set of daily closing prices for Comex gold futures options, this paper tests the Ramaswamy and Sundaresan model against a constant interest rate model. Results indicate that the stochastic interest rate model is a superior predictor of market prices.

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