Price and trading volume effects of introducing foreign exchange futures options trading

Earlier studies have documented price and volatility effects at the time equity options were introduced. This paper analyzes the introduction of foreign exchange futures options trading at the Chicago Mercantile Exchange. To deal with the small number of contract introductions, the analysis uses a Bayesian approach with diffuse (noninformative) priors. The analysis uses a predictive pdf approach to address several hypotheses about the impact of currency futures option contract introductions. The results show little evidence of price effects in the futures or spot currency markets at the time of contract introductions. In addition, there is very little price-related evidence that market professionals adjusted their portfolios in advance of the start of trading in currency futures options. There is some evidence of unusual trading volume before and after trading began in the first of the currency futures options contracts. In general, the evidence of price effects found at the start of equity option trading is not duplicated here, suggesting that currency futures options may have added little to the menu of financial assets.