Options on Foreign Exchange and Exchange Rate Expectations

60 Pages Posted: 15 Feb 2006

See all articles by Eduardo Borensztein

Eduardo Borensztein

Inter-American Development Bank (IADB)

Date Written: March 5, 1987

Abstract

This paper tests alternative assumptions concerning the time series behavior of foreign exchange rates. Data for about 20,000 individual trades on foreign exchange options for dollar exchange rates against six major currencies carried out from February 1983 to June 1985 are analyzed. The tests carried out suggest that, judging from the predictions of a model of options prices based on the assumption that exchange rates follow a diffusion process, market participants paid too high a price for call options that would have been profitable only if the dollar depreciated substantially within a short time period. An alternative model which allows for discrete jumps in exchange rates is found to be more consistent with the data.

Suggested Citation

Borensztein, Eduardo, Options on Foreign Exchange and Exchange Rate Expectations (March 5, 1987). IMF Working Paper No. 87/13, Available at SSRN: https://ssrn.com/abstract=884590

Eduardo Borensztein (Contact Author)

Inter-American Development Bank (IADB) ( email )

1300 New York Avenue NW
Washington, DC 20577
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
114
Abstract Views
850
Rank
435,891
PlumX Metrics