Forecasting Emerging Market Exchange Rates From Foreign Equity Options
Document Type
Article
Publication Date
1-1-2002
Description
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.
Citation Information
Chu, Ting Heng; and Swidler, Steve. 2002. Forecasting Emerging Market Exchange Rates From Foreign Equity Options. Journal of Financial Research. Vol.25(3). 353-366. https://doi.org/10.1111/1475-6803.00023 ISSN: 0270-2592