Deriving Market Expectations for the Euro-Dollar Exchange Rate from Option Prices

Author/Editor:

Noureddine Krichene

Publication Date:

October 1, 2004

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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.

Series:

Working Paper No. 2004/196

Subject:

Asset prices Depreciation Exchange rates Options Reserve requirements

English

Publication Date:

October 1, 2004

ISBN/ISSN:

9781451859997/1018-5941

Stock No:

WPIEA1962004

Pages:

24

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