Index futures options in Australia ‐an empirical focus on volatility

The futures option contract on the Australian All Ordinaries Share Price Index is a relatively new hybrid security that ought to enhance the richness and potential efficiency of security markets. This paper considers the problems of valuing it using the theoretical price of a futures‐style option. It was found that there was little consistency between theoretical prices using a number of historical estimates and observed market prices, either intertemporally or between in‐the‐money or out‐of‐the‐money calls. Further, implied volatility was found to be a decaying function of time and, except at times of instability, did not predict the ex ante futures volatility as well as historic volatility