The paper’s objective is to identify the balance of risks that economic agents incorporate in oil and exchange rate markets (peso/US dollar). For that purpose, two methodologies that are normally used to estimate the expected risk-neutral probability functions for a determinate underlying asset, from option market price quotations, are used: a) the lognormal mix parametric method, to analyze the balance of risks for the oil market during the first quarter of 2003 (period in which the oil price was affected by the Iraq conflict); and, b) the non-parametric method, interpolation of the smile curve, to obtain the risk-neutral probability function for the peso/US dollar exchange rate. The latter methodology is also used to propose a definition of exchange rate risk premium, which compensates investors for the peso-depreciation bias and the higher probability of extreme variations that is observed in the estimated risk-neutral probability functions.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by Banco de México in its series Working Papers with number
2004-01.