The Effects of Increasing Option Multiplier on the Arbitrage Efficiency in KOSPI 200 Futures and Options Markets

This study examines put-call-futures parity in KOSPI 200 index futures and options markets for the sampling period between January of 2011 and December of 2013 in order to investigate whether option multiplier increasing affects on the arbitragee efficiency of an index option market and permanent relationship between futures and options markets by analyzing minute by minute historical index option and future intraday trading data.

What we find is that the arbitrage opportunities associated with put-call-futures parity increase to 5.16% from 1.75% after increasing option multiplier. Although there is no significant change of discrepancies in ATM options, a slight decrease of mispricing is found in the moneyness where call option is OTM. It turns out, however, that the arbitrage opportunities increase by 3.4 times in the moneyness below 0.97 or above 1.03, after increasing multiplier. Also ex-ante analysis shows that most of arbitrage opportunities disappear within one minute, but the speed of dissipation becomes to decrease in the moneyness where the liquidity of ITM options declines to be a very low level. Overall our results suggest that the arbitrage efficiency in the KOSPI 200 index option markets might be deteriorated after an increasing of option multiplier.