Forecasting Emerging Market Exchange Rates from Foreign Equity Options

Posted: 19 Jun 2001

See all articles by Steve Swidler

Steve Swidler

Lafayette College - Department of Economics & Business

Ting-Heng Chu

East Tennessee State University

Abstract

The use of derivatives to infer future exchange rates has long been a subject of interest in the international finance literature. With the recent currency crises in Mexico, Southeast Asia, and Brazil, work on exchange rate expectations in emerging markets is of particular interest. For some emerging markets, foreign equity options are the only liquid exchange traded derivatives with currency information embedded in their prices. Given that emerging markets sometimes undergo currency realignment with discrete jumps in their exchange rate, estimation of risk-neutral probability density functions from foreign equity option data provides valuable evidence concerning market expectations. To illustrate the use of foreign equity options in estimating market beliefs, we consider Telmex options around the 1994 peso devaluation and find evidence that markets anticipated the change in the Mexican government's foreign exchange policy.

JEL Classification: F31, G13

Suggested Citation

Swidler, Steven and Chu, Ting-Heng, Forecasting Emerging Market Exchange Rates from Foreign Equity Options. Available at SSRN: https://ssrn.com/abstract=268250

Steven Swidler (Contact Author)

Lafayette College - Department of Economics & Business ( email )

Easton, PA 18042
United States
610-330-5303 (Phone)

Ting-Heng Chu

East Tennessee State University

Department of Management and Marketing
Johnson City, TN 37614
United States

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