Implied Exchange Rate Distributions
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Implied Exchange Rate Distributions
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Author : José Campa
language : en
Publisher:
Release Date : 1997
Implied Exchange Rate Distributions written by José Campa and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 1997 with Foreign exchange options categories.
This paper uses a rich new data set of option prices on the dollar-mark, dollar-yen, and key EMS cross-rates to extract the entire risk-neutral probability density function (pdf) over horizons of one and three months. We compare three alternative smoothing methods--cubic splines, an implied binomial tree (trimmed and untrimmed), and a mixture of lognormals--for transforming option data into the pdf. Despite their methodological ifferences, the three approaches lead to a similar pdf distinct from the lognormal benchmark, and usually characterized by skewness and leptokurtosis. We then document a striking positive correlation between skewness in these pdfs and the spot rate. The stronger a currency the more expectations are skewed towards a further appreciation of that currency. We interpret this finding as a rejection that these exchange rates evolve as a martingale, or that they follow a credible target zone, explicit or implicit. Instead, this this positive correlation is consistent with target zones with endogenous realignment risk. We discuss two interpretations of our results on skewness: when a currency is stronger, the actual probability of further large appreciation is higher, or because of risk, such states are valued more highly.
Implied Exchange Rate Distribution
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Author : José Campa
language : en
Publisher:
Release Date : 1997
Implied Exchange Rate Distribution written by José Campa and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 1997 with categories.
Option Implied Probability Distributions And Currency Excess Returns
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Author : Allan M. Malz
language : en
Publisher:
Release Date : 2006
Option Implied Probability Distributions And Currency Excess Returns written by Allan M. Malz and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2006 with categories.
This paper describes a method of extracting the risk-neutral probability distribution of future exchange rates from option prices. In foreign exchange markets interbank option pricing conventions make possible reliable inferences about risk-neutral probability distributions with relatively little data. Moments drawn from risk-neutral exchange rate distribution are used to explore several issues related to the puzzle of excess returns in currency markets. Tests of the international capital asset pricing model using risk-neutral moments as explanatory variables indicate that option-based moments have considerably greater explanatory power for excess returns in currency markets than has been found in earlier work. Tests of several hypotheses generated by the peso problem approach indicate that jump risk measured by the risk-neutral coefficient of skewness can explain only a small part of the forward bias. These tests take into account not only the second, but the third and fourth moments of the exchange rate implied by option prices, and avoid testing a joint hypothesis including a distributional assumption.
Currency Options And Exchange Rate Economics
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Author : Zhaohui Chen
language : en
Publisher: World Scientific
Release Date : 1998-04-21
Currency Options And Exchange Rate Economics written by Zhaohui Chen and has been published by World Scientific this book supported file pdf, txt, epub, kindle and other format this book has been release on 1998-04-21 with Business & Economics categories.
This volume is a collection of classical and recent empirical studies of currency options and their implications for issues of exchange rate economics, such as exchange rate risk premium, volatility, market expectations, and credibility of exchange rate regimes. It contains applications on how to extract useful information from option market data for financial forecasting policy purposes. The subjects are discussed in a self-contained, user-friendly format, with introductory chapters on currency option theory and currency option markets.The book can be used as supplementary reading for graduate finance and international economics courses, as training material for central bank and regulatory authorities, or as a reference book for financial analysts.
Foreign Exchange Options And The Economics Of Exchange Rates
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Author : Ranganai Gwati
language : en
Publisher:
Release Date : 2015
Foreign Exchange Options And The Economics Of Exchange Rates written by Ranganai Gwati and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2015 with categories.
Chapter 1: Historically, the currency derivative pricing literature and the macroeconomics literature on FX determination have progressed separately. In this Chapter I argue the joint study of these two strands of literature and give an overview of FX option pricing concepts and terminology crucial for this interdisciplinary study. I also explain the three sources of information about market expectations and perception of risk that can be extracted from FX option prices and review empirical methods for extracting option-implied densities of future exchange rates. As an illustration, I conclude the Chapter by investigating time series dynamics of option-implied measures of FX risk vis-a-vis market events and US government policy actions during the period January 2007 to December 2008. Chapter 2: This Chapter proposes using foreign exchange (FX) options with different strike prices and maturities to capture both FX expectations and risks. We show that exchange rate movements, which are notoriously difficult to model empirically, are well-explained by the term structures of forward premia and options-based measures of FX expectations and risk. Although this finding is to be expected, expectations and risk have been largely ignored in empirical exchange rate modeling. Using daily options data for six major currency pairs, we first show that the cross section options-implied standard deviation, skewness and kurtosis consistently explain not only the conditional mean but also the entire conditional distribution of subsequent currency excess returns for horizons ranging from one week to twelve months. This robust empirical pattern is consistent with a representative expected utility maximizing investor who, in addition to caring about the mean and variance, also cares about the skewness and kurtosis of the return distribution. Our results highlight the importance of expectations and risk in explaining exchange rate dynamics and suggest that the perennial problems faced by the empirical exchange rate literature are most likely due to overly restrictive auxiliary assumptions inherent in prevailing testing methods. Chapter 3: Standard ordinary least squares (OLS)-based tests of the uncovered interest parity (UIP) condition often make strong auxiliary assumptions beyond the joint hypotheses of rational expectations and risk-neutrality. This paper proposes using prices of foreign exchange (FX) option with different strike prices to test the time-varying risk premia explanation of the UIP puzzle. The options-based testing framework rests on the theoretical result that the forward exchange rate is the theoretical first moment of the option-implied distribution of future spot exchange rate. The framework allows us to test a more general version of FX market efficiency, which is the hypothesis that the option-implied risk-neutral distribution is an unbiased predictor of the future realized distribution of future spot rate. For five currency pairs, I do not reject the null hypothesis of UIP using the options-based approach.
Currency Derivatives
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Author : David F. DeRosa
language : en
Publisher: John Wiley & Sons
Release Date : 1998-09-07
Currency Derivatives written by David F. DeRosa and has been published by John Wiley & Sons this book supported file pdf, txt, epub, kindle and other format this book has been release on 1998-09-07 with Business & Economics categories.
Mit über einer Billion US Dollar Umsatz stellt der Devisenhandel weltweit den größten Markt dar. In diesem Markt sind Währungsderivate zu einem bevorzugten Handelsinstrument geworden, das von Großbanken, Brokerhäusern, Hedge Funds (spekulativ ausgerichteter Fonds, der mit Hilfe von Derivaten seine Gewinne zu optimieren versucht) und Handelsberatern eingesetzt wird. Zwar sind diese Instrumente heute komplexer denn je, aber sie sind ein unverzichtbares Mittel des Risikomanagements im Devisenhandel. Herausgegeben von führenden Devisenhändlern und Analysten, ist dieses Buch Basislektüre für jeden, der sich in diesem Bereich bewegt. Eine Sammlung der 20 besten und meist zitierten Beiträge zu Währungsderivaten, Preistheorie und Anwendungen von Hedging-Methoden (10/98)
The Distribution Of Exchange Rate Volatility
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Author : Torben G. Anderson
language : en
Publisher:
Release Date : 1999
The Distribution Of Exchange Rate Volatility written by Torben G. Anderson and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 1999 with Foreign exchange rates categories.
Abstract: Using high-frequency data on Deutschemark and Yen returns against the dollar, we construct model-free estimates of daily exchange rate volatility and correlation, covering an entire decade. In addition to being model-free, our estimates are also approximately free of measurement error under general conditions, which we delineate. Hence, for all practical purposes, we can treat the exchange rate volatilities and correlations as observed rather than latent. We do so, and we characterize their joint distribution, both unconditionally and conditionally. Noteworthy results include a simple normality-inducing volatility transformation, high contemporaneous correlation across volatilities, high correlation between correlation and volatilities, pronounced and highly.
Deriving Market Expectations For The Euro Dollar Exchange Rate From Option Prices
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Author : Noureddine Krichene
language : en
Publisher: International Monetary Fund
Release Date : 2004-10
Deriving Market Expectations For The Euro Dollar Exchange Rate From Option Prices written by Noureddine Krichene and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2004-10 with Business & Economics categories.
Option prices provide valuable information on market expectations. This paper attempts to extract market expectations, as conveyed by an implied risk-neutral probability distribution, from option prices for the dollar-euro exchange rate. Returns' volatilities are inferred from observed and interpolated option prices. To address robustness, two distributions, one from actual data and the other from interpolated data, were computed. The main conclusion of the paper is that traders have wide-ranging expectations, and large movements in either direction would not occur as a surprise. The main implication for monetary policy is that should markets become too volatile, then intervention may be required.
Option Implied Risk Neutral Distributions And Risk Aversion
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Author : Jens Carsten Jackwerth
language : en
Publisher:
Release Date : 2008
Option Implied Risk Neutral Distributions And Risk Aversion written by Jens Carsten Jackwerth and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2008 with categories.
Using Copulas To Construct Bivariate Foreign Exchange Distributions With An Application To The Sterling Exchange Rate Index
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Author : Matthew Hurd
language : en
Publisher:
Release Date : 2007
Using Copulas To Construct Bivariate Foreign Exchange Distributions With An Application To The Sterling Exchange Rate Index written by Matthew Hurd and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2007 with categories.
"We model the joint risk-neutral distribution of the euro-sterling and the dollar-sterling exchange rates using option-implied marginal distributions that are connected via a copula function that satisfies the triangular no-arbitrage condition. We then derive a univariate distribution for a simplified sterling effective exchange rate index. Our results indicate that standard parametric copula functions, such as the commonly used Normal and Frank copulas, fail to capture the degree of asymmetry observed in the data. We overcome this problem by using a non-parametric dependence function in the form of a Bernstein copula which is shown to produce a very close fit. We further give an example of how our approach can be used to price currency index options."--Bank of England web site.