The sovereignty option: the Quebec referendum and market views on the Canadian dollar

We use exchange traded options on Canadian dollar futures to estimate the market's risk-neutral distribution for the Canadian dollar in the days before and after the Quebec sovereignty referendum. We employ a relatively new technique that places little a priori structure on the estimated distribution. This lack of structure allows the estimated distribution to reflect the multi-modal nature of expectations associated with the referendum's results. The technique is especially suited to circumstances in which a particular event will reduce a large degree of uncertainty prior to the expiration date of the options. Our estimated distributions are consistent with a significant perceived probability that the Canadian dollar would move up or down by as much as 5 percent as a result of the vote.