Estimating the Probability Distribution of the Future Exchange Rate from Option Prices

A paper describes a method of extracting the risk-neutral probability distribution of future exchange rates from option prices. In foreign exchange markets, interbank option pricing conventions facilitate reliable inferences about risk-neutral probability distributions with a small amount of readily...

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Published in:The Journal of derivatives 1997-12, Vol.5 (2), p.18-36
Main Author: Malz, Allan M.
Format: Article
Language:English
Subjects:
Derivatives
Economic models
Foreign exchange markets
Foreign exchange rates
Probability
Probability distribution
Risk assessment
Securities prices
Volatility
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description A paper describes a method of extracting the risk-neutral probability distribution of future exchange rates from option prices. In foreign exchange markets, interbank option pricing conventions facilitate reliable inferences about risk-neutral probability distributions with a small amount of readily available information. The risk-neutral probability distribution of the future exchange rate provides investors and market analysts with an important tool for gauging market sentiment.
doi_str_mv 10.3905/jod.1997.407988
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subjects Derivatives
Economic models
Foreign exchange markets
Foreign exchange rates
Probability
Probability distribution
Risk assessment
Securities prices
Volatility
title Estimating the Probability Distribution of the Future Exchange Rate from Option Prices
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