Financial Markets' Views about the Euro—Swiss Franc Floor

Exchange rates and option prices incorporate market participants' views about the credibility and the effects of exchange rate targets. I present a model to determine exchange rates under policy targets that can be used to price options. The model is estimated with Euro—Swiss Franc exchange rat...

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Published inJournal of money, credit and banking Vol. 49; no. 2/3; pp. 553 - 565
Main Author JERMANN, URBAN J.
Format Journal Article
LanguageEnglish
Published Columbus Wiley Subscription Services 01.03.2017
Ohio State University Press
Subjects
currency options
Euro
Europe
exchange rate target
Foreign exchange rates
Francs
G12
Securities prices
SHORTER PAPERS, DISCUSSIONS, AND LETTERS
Swiss franc
Switzerland
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Summary:Exchange rates and option prices incorporate market participants' views about the credibility and the effects of exchange rate targets. I present a model to determine exchange rates under policy targets that can be used to price options. The model is estimated with Euro—Swiss Franc exchange rate and options price data. In the first few months of the minimum exchange rate policy, the implied survival probability of the policy for a 3-month horizon was typically less than 75%. Over time, the credibility increased and this probability reached 95% in August 2014.
Bibliography:http://finance.wharton.upenn.edu/~jermann/research.html
Comments from seminar participants at the Wharton School, London Business School, as well as from Philipp Illeditsch, Jakub Jurek, Karen Lewis, Nick Roussanov, Amir Yaron, Ken West (the editor), and two anonymous referees are gratefully acknowledged. A not‐for‐publication appendix is available at
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ISSN:0022-2879
1538-4616
DOI:10.1111/jmcb.12389