Alan L. Tucker, Lallon Pond, The Probability Distribution of Foreign Exchange Price Changes: Tests of Candidate Processes, The Review of Economics and Statistics, Vol. 70, No. 4 (Nov., 1988), pp. 638-647

Joseph P. Ogden, Alan L. Tucker, The Relative Valuation of American Currency Spot and Futures Options: Theory and Empirical Tests, The Journal of Financial and Quantitative Analysis, Vol. 23, No. 4 (Dec., 1988), pp. 351-368

Currency call option transactions data and the Black‐Scholes option pricing model, as modified by Merton for continuous dividends and as adapted to currency options by Biger and Hull and by Garman and Kohlhagen, are used to imply spot foreign exchange rates. The proportional deviation between implied and simultaneously observed spot rates is found to be a direct and statistically significant determinant of subsequent returns on foreign currency holdings after controlling for interest rate differentials. Further, an ex ante trading rule reveals that the additional information contained in implied rates often is sufficient to generate significant economic profits.

Currency call option transactions data and the Black-Scholes option pricing model, as modified by Merton for continuous dividends and as adapted to currency options by Biger and Hull and by Garman and Kohlhagen, are used to imply spot foreign exchange rates. The proportional deviation between implied and simultaneously observed spot rates is found to be a direct and statistically significant determinant of subsequent returns on foreign currency holdings after controlling for interest rate differentials. Further, an ex ante trading rule reveals that the additional information contained in implied rates often is sufficient to generate significant economic profits.