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Deriving Market Expectations for the Euro-Dollar Exchange Rate from Option Prices
Author:
Mr. Noureddine Krichene
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Series:
IMF Working Papers
Volume/Issue:
Volume 2004: Issue 196
Language:
English
Publication Date:
01 Oct 2004
DOI:
https://doi.org/10.5089/9781451859997.001
ISBN:
9781451859997
ISSN:
1018-5941
Pages:
24
Keywords:
WP; strike price; forward rate; probability distribution
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund