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On the Credibility of the Euro/Swiss Franc Floor: A Financial Market Perspective

Author

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  • Hertrich, Markus

    () (University of Basel)

  • Zimmermann, Heinz

    () (University of Basel)

Abstract

The sheer existence of EUR/CHF put options with strike prices below the EUR/CHF 1.20 ?oor, trading at non-zero cost, challenged the full credibility of the Swiss National Bank (SNB) in enforcing the lower barrier implemented in September 6, 2011 and abandoned on January 15, 2015. We estimate the risk-neutral break probabilities of a realignment of the ?oor from market prices of put options, using an extension of the Veestraeten option pricing model which assumes that the underlying security price exhibits a lower barrier. We estimate probabilities considerably di?erent from zero, even when the exchange rate traded far above the EUR/CHF 1.20 ?oor. We observe a drastic increase in the break-probabilities after August 2014, reaching a level of nearly 50%. The credibility of the SNB in maintaining the ?oor, as seen from the option market, was thus substantially lower than publicly claimed.

Suggested Citation

  • Hertrich, Markus & Zimmermann, Heinz, 2015. "On the Credibility of the Euro/Swiss Franc Floor: A Financial Market Perspective," Working papers 2015/09, Faculty of Business and Economics - University of Basel.
  • Handle: RePEc:bsl:wpaper:2015/09
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Mirkov, Nikola & Pozdeev, Igor & Soderlind, Paul, 2016. "Toward Removal of the Swiss Franc Cap: Market Expectations and Verbal Interventions," Working Papers on Finance 1614, University of St. Gallen, School of Finance.
    2. Hui, Cho-Hoi & Lo, Chi-Fai & Fong, Tom Pak-Wing, 2016. "Swiss franc's one-sided target zone during 2011–2015," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 54-67.
    3. repec:gam:jrisks:v:5:y:2017:i:3:p:35-:d:103608 is not listed on IDEAS
    4. Michael Funke & Julius Loermann & Richhild Moessner, 2017. "The discontinuation of the EUR/CHF minimum exchange rate in January 2015: was it expected?," BIS Working Papers 652, Bank for International Settlements.
    5. Berhold, Kerstin & Stadtmann, Georg, 2017. "Who put the holes in the Swiss cheese? Currency crisis under appreciation pressure," Discussion Papers 391, European University Viadrina Frankfurt (Oder), Department of Business Administration and Economics.
    6. Hertrich Markus, 2016. "The Costs of Implementing a Unilateral One-Sided Exchange Rate Target Zone," Review of Economics, De Gruyter, vol. 67(1), pages 91-120, May.
    7. Markus Hertrich, 2015. "A Cautionary Note on the Put-Call Parity under an Asset Pricing Model with a Lower Reflecting Barrier," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 151(III), pages 227-260, September.

    More about this item

    Keywords

    currency options; central banking; credibility; Euro/Swiss franc floor; Vanna-Volga method; barrier;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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