Zastosowanie zmienności implikowanej strategii risk reversal dla opcji na kurs walutowy do oceny oczekiwań uczestników rynku

Katarzyna Czech

doi:10.17951/h.2017.51.6.63

Abstract

Measures of volatility implied in option prices can provide important insight into market participants’ perception about the future price movement of the underlying asset. The aim of the paper is to show the application of foreign-exchange options’ 25-delta risk reversals to evaluate skewness of market expectations on future changes in currency value. It has been shown that different events, such as the United States subprime mortgage crisis, the collapse of Lehman Brothers, the 2015 Pacific typhoon or the 2016 Brexit referendum, highly affected market view about the balance of risk between a large appreciation and a large depreciation of the currency. In the analysed period, the market quotes on risk reversals were substantially changing.

Highlights

Currency option market has developed strongly since breakdown of the Bretton Wood agreement in the early 1970s
Measures of volatility implied in option prices can provide important insight into market participants’ perception about the future price movement of the underlying asset
The paper is focused on foreign exchange options risk reversals volatility

Summary

Introduction

Currency option market has developed strongly since breakdown of the Bretton Wood agreement in the early 1970s. The changes in market expectations can be observed based on the measures of volatility implied in option prices. They can provide important insight into market participants’ perception about the future price movement of the underlying asset. S the market participants’ expectations concerning the future movement of the underlying assets It may, for instance, inform us whether market participants place greater probability on a downward than on an upward price changes. The paper is focused only on option’s risk reversal implied volatility and its application in deriving market expectations. Much attention is put to depict the risk reversal options’ combination and its application for assessing market participants’ expectation about future price movements of underlying asset.

Foreign exchange options risk reversals

C St – the price of underlying asset at time t

Extracting market expectations from currency options’ 25-delta risk reversal

II III IV

Findings

Conclusions