Selected studies in Finance have found some inefficiencies in the options and futures markets relative to the pricing models tested. However, there has been no empirical research performed to date in formulating trading strategies to capitalize on unexploited "arbitrage" opportunities which pertains to market inefficiencies.
This thesis examines the profitability of developed trading strategies, by forming hedge portfolios, utilizing selected securities trading on the Sydney Options Trading Post and futures contracts written on the Australian All-Ordinaries Share Price Index traded on the Sydney Futures Exchange.
The hedge portfolios are formed, on a daily basis, using data collected over a period from February 1983 to March 1987. It was found that trading strategies initiated by buying SPI futures contracts and selling stock option portfolios to be more profitable than the reverse trading strategy. In addition, trading strategies initiated by buying SPI futures contracts and selling stock option contracts, either when the SPI futures price is at a discount or premium to the All-Ordinaries index, demonstrated to be most profitable in the March and September quarters in the sample period. However, it was found that there were no trading strategies to be profitable consistently through out the sample period.
It is noted that the profitability of the initiated trading strategies are correlated with the riskiness of the hedge portfolio created. Turning to the issue of market efficiency, the results and findings of this thesis does not imply that the market is semi-strong form efficient; but merely provides some evidence of this level of market efficiency.