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Measuring the degree of currency misalignment using offshore forward exchange rates: The case of the Korean Financial crisis

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  • D Park

    (Hanyang University)

  • C Rhee

Abstract

This paper proposes a new method of measuring the degree of currency misalignment through the use of offshore forward exchange rates. Using default risk-adjusted no-arbitrage conditions for forward exchange contracts, we calculate the spot exchange rates and the domestic interest rates that are implied from the observed forward exchange rates. The difference between the implied and the observed spot exchange rates is our measure of currency misalignment. Our methodology is based on the presumption that, during a currency crisis, offshore forward exchange rates reflect market fundamentals more closely than onshore spot and forward exchange rates. The latter are usually tightly regulated and heavily affected by government intervention during a non-normal event such as a financial crisis. We apply the method to the 1997 Korean currency crisis.

Suggested Citation

  • D Park & C Rhee, 2001. "Measuring the degree of currency misalignment using offshore forward exchange rates: The case of the Korean Financial crisis," Journal of Asset Management, Palgrave Macmillan, vol. 2(1), pages 84-95, June.
    • Handle: RePEc:pal:assmgt:v:2:y:2001:i:1:d:10.1057_palgrave.jam.2240037
    DOI: 10.1057/palgrave.jam.2240037
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    Cited by:

    1. Burnside, Craig & Eichenbaum, Martin & Rebelo, Sergio, 2006. "Government finance in the wake of currency crises," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 401-440, April.
    2. Owyong, David & Wong, Wing-Keung & Horowitz, Ira, 2015. "Cointegration and causality among the onshore and offshore markets for China's currency," Journal of Asian Economics, Elsevier, vol. 41(C), pages 20-38.
    3. Doukas, John A. & Zhang, Hao, 2013. "The performance of NDF carry trades," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 172-190.

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