IDEAS home Printed from
   My bibliography  Save this paper

Deriving Market Expectations for the Euro-Dollar Exchange Rate from Option Prices


  • Noureddine Krichene


Option prices provide valuable information on market expectations. This paper attempts to extract market expectations, as conveyed by an implied risk-neutral probability distribution, from option prices for the dollar-euro exchange rate. Returns' volatilities are inferred from observed and interpolated option prices. To address robustness, two distributions, one from actual data and the other from interpolated data, were computed. The main conclusion of the paper is that traders have wide-ranging expectations, and large movements in either direction would not occur as a surprise. The main implication for monetary policy is that should markets become too volatile, then intervention may be required.

Suggested Citation

  • Noureddine Krichene, 2004. "Deriving Market Expectations for the Euro-Dollar Exchange Rate from Option Prices," IMF Working Papers 04/196, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:04/196

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 327-343.
    2. Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 145-166.
    3. Breeden, Douglas T & Litzenberger, Robert H, 1978. "Prices of State-contingent Claims Implicit in Option Prices," The Journal of Business, University of Chicago Press, vol. 51(4), pages 621-651, October.
    4. Bakshi, Gurdip & Madan, Dilip, 2000. "Spanning and derivative-security valuation," Journal of Financial Economics, Elsevier, vol. 55(2), pages 205-238, February.
    5. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    6. Rubinstein, Mark, 1994. " Implied Binomial Trees," Journal of Finance, American Finance Association, vol. 49(3), pages 771-818, July.
    7. Mark Rubinstein., 1994. "Implied Binomial Trees," Research Program in Finance Working Papers RPF-232, University of California at Berkeley.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Fabrice Rousseau & Laurent Germain & Fabrice Rousseau & Anne Vanhems, 2008. "Irrational Financial Markets," Economics, Finance and Accounting Department Working Paper Series n1870108.pdf, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
    2. Laurent Germain & Fabrice Rousseau & Anne Vanhems, 2014. "Irrational Market Makers," Finance, Presses universitaires de Grenoble, vol. 35(1), pages 107-145.
    3. Bednarik, Radek, 2008. "Analýza volatility devizových kurzů vybraných ekonomik
      [The Analysis of Volatility of Selected Countries' Exchange Rates]
      ," MPRA Paper 15046, University Library of Munich, Germany.


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:04/196. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jim Beardow) or (Hassan Zaidi). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.