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Is It Possible to Replicate the Exchange Rate Volatility Behavior Using Dynamic Strategies?

Author

Listed:
  • Ronny Kim Woo

    (IBMEC)

  • José Valentim Machado Vicente

    (Banco Central do Brasil e IBMEC)

  • Claudio Henrique Barbedo

    (Banco Central do Brasil e IBMEC)

Abstract

The implied volatility is certainly an interesting indicator to help get a sense of the market, because it represents the amount of expected volatility the market is pricing. In over-the-counter exchange rate option, whose trading is volatility oriented, it is the most important variable. This work investigates whether information embedded in this implied volatility market are explained by other traded variables in the Brazilian market. The results show that there are sources of non-negotiable risk that influence this implied volatility. Therefore, exchange rate implied volatility can assist to understand the behavior of the derivatives indexed to dollar.

Suggested Citation

  • Ronny Kim Woo & José Valentim Machado Vicente & Claudio Henrique Barbedo, 2009. "Is It Possible to Replicate the Exchange Rate Volatility Behavior Using Dynamic Strategies?," Brazilian Review of Finance, Brazilian Society of Finance, vol. 7(4), pages 485-501.
    • Handle: RePEc:brf:journl:v:7:y:2009:i:4:p:485-501
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    More about this item

    Keywords

    implied volatility; exchange rate option; principal components.;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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