An empirical investigation of the EOE gold options market

On April 2, 1981, the European Option Exchange introduced the first organized exchange trading of options on spot gold. We study this new market for three months at its inception and in a parallel period a year later via various tests of rational boundary conditions. Additionally, we use call-put parity to infer implied risk free rates (IRFR's). Deviations of the IRFR's from the prevailing risk free rate permit the possibility of arbitrage through positions known as forward and reverse conversions. Our tests are modified to allow for transaction costs to more fully address the question of market efficiency.