Tests of the Black-Scholes and constant elasticity of variance currency call option valuation models

An adaptation of the Cox‐Ross/Emanuel‐MacBeth call option valuation model for constant elasticity of variance diffusion processes is tested here against an adaptation of the Black‐Scholes call option valuation model for the pricing of call currency options. Synchronized transactions data supplied by the Philadelphia Exchange are used. A maximum likelihood estimation procedure indicates a significant association between currency return variances and exchange rate levels. The constant elasticity of variance model exhibits significantly superior pricing accuracy for predictive intervals of three or fewer trading days.