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

Download or read book Deriving Market Expectations for the Euro-Dollar Exchange Rate from Option Prices written by Noureddine Krichene and published by . This book was released on 2006 with total page 25 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.