Correspondence: Alok Dixit, Department of Management Studies, Indian Institute of Technology Delhi (IIT Delhi), Hauz Khas, New Delhi 16, India. E-mail: alokdixit.iitd@gmail.com

¹is currently a senior research scholar in the Department of Management Studies of the Indian Institute of Technology Delhi (IIT Delhi), India. His area of research is 'Pricing efficiency of options contracts in the Indian derivatives market'. Before joining IIT, he was a permanent faculty. He was awarded Junior Research Fellowship of the University Grants Commission (UGC-JRF) in management to pursue research anywhere in India. Before this, he cleared the eligibility test for lectureship (UGC-NET) while pursuing his postgraduate degree.

²is currently Professor of Finance and Head of the Department of Management Studies at the Indian Institute of Technology Delhi (IIT Delhi), India. He teaches Corporate Finance, International Finance, International Business, and Security Analysis and Portfolio Management. He has been a visiting professor at the University of Paris, Paris School of Management, INSEEC Paris, and the University of Tampa, USA. He has published nine books and contributed more than 115 papers to research journals and conferences. He has also contributed more than 30 papers to financial/economic newspapers.

³is Professor of Finance at the Department of Management Studies at the Indian Institute of Technology Delhi (IIT Delhi), India. He has been Modi Foundation Chair Professor as well as Dalmia Chair Professor. He has more than 35 years' teaching experience in subjects related to Management Accounting, Financial Management, Financial Analysis, Cost Analysis and Cost Control. He has been a visiting faculty at the University of Paris I, Paris School of Management, AIT Bangkok, Howe School of Technology Management at Stevens Institute of Technology, New Jersey; and ICPE, Ljubljana. He has published about a dozen textbooks and 11 research books/monographs. He has contributed more than 125 research papers in journals of national and international repute.

Received 12 March 2008; Revised 12 March 2008.

Abstract

This paper examines the lower boundary conditions (LBCs) for the S&P CNX Nifty Index options in the Indian securities (options) market. In India, the option contracts on the index are European in nature, that is, they can be exercised only at maturity. This study covers a period of 6 years, from 4 June 2001 (starting date for index options in India) to 30 June 2007. The results demonstrate that the violation of the LBC is more frequent and pronounced in the case of call options than that of put options. This implies that there are arbitrage opportunities on account of violation of the LBC and is indicative of the inefficiency of the Indian options market. In this study, the results have been interpreted considering the problems of nonsimultaneity, dividends, bid – ask spread, and transactions cost; that is, we have tried to adhere to the real conditions prevailing in the market in order to enhance the authenticity of the findings. Although the test conducted is ex-post in nature, it does not essentially comment on the exploitability of abnormal profits suggested by mispricing (underpricing) signals. The results of the study that the options market is inefficient are more suggestive and indicative in nature than conclusive.