Abstract
We derive risk-neutral probability densities for future euro/Swiss franc exchange rates as implied by option prices. We find that the credibility of the Swiss franc floor decreased somewhat as the spot exchange rate approached the lower bound of 1.20 CHF per euro. We also compare the forecasting performance of a random walk benchmark model with an error-correction model (ECM) augmented with option-implied break probabilities of breaching the currency floor. We find some evidence that the augmented ECM has an informational advantage over the random walk when using one-month break probabilities. But we find that one-month option-implied densities cannot predict the entire range of exchange rate realizations.
Acknowledgments
We would like to thank two anonymous reviewers for useful comments and suggestions which have helped to improve the paper. The views expressed are those of the authors and should not be taken to reflect those of the Bank for International Settlements.
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Supplementary Material
The online version of this article offers supplementary material (https://doi.org/10.1515/snde-2019-0078).
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