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Derman and Kani~1994!, Dupire~1994!, and Rubinstein~1994! hypothesize that asset return volatility is a deterministic function of asset price and time, and develop a deterministic volatility function~DVF! option valuation model that has the potential of fitting the observed cross section of option prices exactly. Using S&P 500 options from June 1988 through December 1993, we examine the predictive and hedging performance of the DVF option valuation model and find it is no better than an ad hoc procedure that merely smooths Black-Scholes~1973! implied volatilities across exercise prices and times to expiration. EXPECTED FUTURE VOLATILITY PLAYS a central role in finance theory. Consequently, accurately estimating this parameter is crucial to meaningful financial decision making. Finance researchers generally rely on the past behavior of asset prices to develop expectations about volatility, documenting movements in volatility as they relate to prior volatility and0or variables

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