Email this article 
Hide
Show all
Extracting Market Expectations from Currency Options’ Risk Reversals
Abstract
Measures of volatility implied in option prices can provide important insight into market participants’ perception about the future price movement of the underlying asset. The aim of the paper is to show the application of foreign-exchange options’ 25-delta risk reversals to evaluate skewness of market expectations on future changes in currency value. It has been shown that different events, such as the United States subprime mortgage crisis, the collapse of Lehman Brothers, the 2015 Pacific typhoon or the 2016 Brexit referendum, highly affected market view about the balance of risk between a large appreciation and a large depreciation of the currency. In the analysed period, the market quotes on risk reversals were substantially changing.
Keywords
Full Text:
PDFReferences
Bank for International Settlements BIS, Triennial Central Bank Survey. Foreign Exchange Turnover in April 2016, Monetary and Economy Department, 2016 (September).
Beber A., Breedon F., Buraschi A., Differences in Beliefs and Currency Risk Premiums, “Journal of Financial Economics” 2010, No. 98.
Black F., Scholes M., The Pricing of Options and Corporate Liabilities, “Journal of Political Economy” 1973, Vol. 81(3), DOI: https://doi.org/10.1086/260062.
Bliss R., Panigirtzoglou N., Testing the Stability of Implied Probability Density Functions, “Journal of Banking & Finance” 2002, Vol. 26(2), DOI: https://doi.org/10.1016/S0378-4266(01)00227-8.
Botman D.P., Carvalho Filho I. de, Lam W.R., The Curious Case of the Yen as a Safe Haven Currency: A Forensic Analysis, “International Monetary Fund” 2013, No. WP/13/228.
Botman D.P., Kang J.S., Japan’s Role in the Global Economy and Spillover Effects of Abenomics, [in:] D. Botman, S. Danninger, J. Schiff (eds.), Can Abenomics Succeed? Overcoming the Legacy of Japan’s Lost Decades, International Monetary Fund, Washington 2015.
Breeden D., Litzenberger R., Prices of State-Contingent Claims Implicit in Option Prices, “Journal of Business” 1978, Vol. 51(4), DOI: https://doi.org/10.1086/296025.
Brunnermeier M.K., Nagel S., Pedersen L.H., Carry Trades and Currency Crashes, “NBER Working Paper Series. Macroeconomics Annual” 2008, Vol. 23(1), DOI: https://doi.org/10.1086/593088.
Campa J.M., Chang P.K., Reider R.L., Implied Exchange Rate Distributions: Evidence from OTC Option Markets, “Journal of International Money and Finance” 1998, Vol. 17(1), DOI: https://doi.org/10.1016/S0261-5606(97)00054-5.
Carr P., Wu L., Stochastic Skew in Currency Options, “Journal of Financial Economics” 2007, Vol. 86, DOI: https://doi.org/10.1016/j.jfineco.2006.03.010.
Coleman T.F., Li Y., Verma A., Reconstructing the Unknown Local Volatility Function, [in:] Quantitative Analysis in Financial Markets, “Collected Papers of the New York University Mathematical Finance Seminar” 2001, Vol. 2 (January), DOI: https://doi.org/10.1142/9789812810663_0007.
Czech K., Anomalia premii terminowej na rynku jena japońskiego, Wydawnictwo SGGW, Warszawa 2016.
Deuskar P., Gupta A., Subrahmanyam M.G., The Economic Determinants of Interest Rate Option Smiles, “Journal of Banking & Finance” 2008, No. 32.
Dumas B., Fleming J., Whaley R.E., Implied Volatility Functions: Empirical Tests, “Journal of Finance” 1998, Vol. 53(6), DOI: https://doi.org/10.1111/0022-1082.00083.
Foresi S., Wu L., Crash-o-Phobia: A Domestic Fear or a Worldwide Concern?, “Journal of Derivatives” 2005, Vol. 13(2), DOI: https://doi.org/10.3905/jod.2005.605352.
Gagnon J.E., Chaboud A.P., What Can the Data Tell Us About Carry Trades in Japanese Yen?, “Federal Reserve International Finance Discussion Papers” 2007, No. 899.
Garman M.B., Kohlhagen S.W., Foreign Currency Option Values, “Journal of international Money and Finance” 1983, Vol. 2(3), DOI: https://doi.org/10.1016/S0261-5606(83)80001-1.
Heynen R., Kemna A., Vorst T., Analysis of the Term Structure of Implied Volatilities, “Journal of Financial and Quantitative Analysis” 1994, Vol. 29(1), DOI: https://doi.org/10.2307/2331189.
Kohler M., Exchange Rates During Financial Crises, “Bank for International Settlements Quarterly Review” 2010, March.
Liu M.H., Margaritis D., Tourani-Rad A., Risk Appetite, Carry Trade and Exchange Rates, “Global Finance Journal” 2012, Vol. 23(1), DOI: https://doi.org/10.1016/j.gfj.2012.01.004.
Malz A., A Simple and Reliable Way to Compute Option-Based Risk-Neutrals Distributions, “Federal Reserve Bank of New York Staff Reports” 2014, No. 677.
Malz A., Estimating the Probability Distribution of the Future Exchange Rate from Options Prices, “Journal of Derivatives” 1997, Vol. 5(2), DOI: https://doi.org/10.3905/jod.1997.407988.
Mayhew S., Implied Volatility, “Financial Analysts Journal” 1995, Vol. 51(4), DOI: https://doi.org/10.2469/faj.v51.n4.1916.
Omer M., Variations in Risk Aversion. Assessing the Time Dependency of Risk Aversion Recovered from Option Prices, VDM Verlag Dr. Müller, Saarbrücken 2009.
Wang G.J., Option Implied Volatility. Volatility Estimation, Smile Phenomenon, and Forecasting, VDM Verlag Dr. Müller, Saarbrücken 2008.
DOI: http://dx.doi.org/10.17951/h.2017.51.6.63
Date of publication: 2018-02-27 16:37:56
Date of submission: 2017-05-22 12:15:36
Statistics
Indicators
Refbacks
- There are currently no refbacks.
Copyright (c) 2018 Katarzyna Czech
This work is licensed under a Creative Commons Attribution 4.0 International License.