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Market Perceptions of Exchange Rate Risk

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Abstract

The prices for foreign exchange options allow us to extract information on implied market perceptions of future exchange rate risk. This note illustrates the techniques, looking at the behaviour of the New Zealand dollar over recent years. Our analysis suggests that the behaviour of the NZD/USD market has changed significantly since the global financial crisis. During the crisis, markets became increasingly uncertain and the balance of risks changed significantly with the market placing much more weight on the chance of depreciation than of appreciation. Although volatility in the NZD/USD is currently quite low, the market continues to price significantly more risk of depreciation than of appreciation.

Suggested Citation

  • Michelle Lewis, 2012. "Market Perceptions of Exchange Rate Risk," Reserve Bank of New Zealand Analytical Notes series AN2012/12, Reserve Bank of New Zealand.
    • Handle: RePEc:nzb:nzbans:2012/12
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    References listed on IDEAS

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    1. Aron Gereben, 2002. "Extracting market expectations from option prices?," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 65, March.
    2. Bjørnland, Hilde C. & Gerdrup, Karsten & Jore, Anne Sofie & Smith, Christie & Thorsrud, Leif Anders, 2011. "Weights and pools for a Norwegian density combination," The North American Journal of Economics and Finance, Elsevier, vol. 22(1), pages 61-76, January.
    3. de Vincent-Humphreys, Rupert & Puigvert Gutiérrez, Josep Maria, 2010. "A quantitative mirror on the Euribor market using implied probability density functions," Working Paper Series 1281, European Central Bank.
    4. Aron Gereben, 2002. "Extracting market expectations from option prices: an application to over-the-counter New Zealand dollar options," Reserve Bank of New Zealand Discussion Paper Series DP2002/04, Reserve Bank of New Zealand.
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    Cited by:

    1. Matthew Greenwood-Nimmo & Daan Steenkamp & Rossouw van Jaarsveld, 2022. "CaninformationonthedistributionofZARreturnsbeusedtoimproveSARBsZARforecasts," Working Papers 11035, South African Reserve Bank.

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