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Options valuation included jumps in intervention period
[Oceňování opcí se zahrnutím skoků v období intervencí]

Author

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  • Martin Diviš

Abstract

The fundamental equilibrium of the FX rate was significantly impacted by interventions of the Czech national bank. This article focuses on intervention influence on option valuation EURCZK currency pair as an underlying asset in years 2013-2017. We describe and quantify the prices of aforementioned FX options applying different approaches for historical and implied volatility estimation. Applying the implied volatility, we calibrate the jump diffusion model which provides the description of magnitude and direction of jumps in the underlying asset price. Mainly to ensure better comparability of the data for volatility and model estimation, both pre-intervention and post-intervention data were used. Estimated parameters show, that markets in 2013 did not trust the Czech economy and expected jump depreciation of the Czech crown. In 2014 and 2015 markets expected no major deviations from the exchange rate commitment and, therefore, only depreciation was expected. From 2016 onwards markets adjusted expectations in line with the exit from exchange rate commitment and hence expected appreciation. Due to high volumes of speculative capital and large short sales of the Czech crown markets again expected depreciation.

Suggested Citation

  • Martin Diviš, 2017. "Options valuation included jumps in intervention period [Oceňování opcí se zahrnutím skoků v období intervencí]," Český finanční a účetní časopis, Prague University of Economics and Business, vol. 2017(3), pages 19-38.
  • Handle: RePEc:prg:jnlcfu:v:2017:y:2017:i:3:id:499:p:19-38
    DOI: 10.18267/j.cfuc.499
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    References listed on IDEAS

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    1. Merton, Robert C., 1976. "Option pricing when underlying stock returns are discontinuous," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 125-144.
    2. F. De Jong & F. C. Drost & B. J. M. Werker, 2001. "A Jump‐diffusion Model for Exchange Rates in a Target Zone," Statistica Neerlandica, Netherlands Society for Statistics and Operations Research, vol. 55(3), pages 270-300, November.
    3. Cadenillas, Abel & Zapatero, Fernando, 1999. "Optimal Central Bank Intervention in the Foreign Exchange Market," Journal of Economic Theory, Elsevier, vol. 87(1), pages 218-242, July.
    4. Ole E. Barndorff-Nielsen & Almut E. D. Veraart, 2012. "Stochastic Volatility of Volatility and Variance Risk Premia," Journal of Financial Econometrics, Oxford University Press, vol. 11(1), pages 1-46, December.
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    More about this item

    Keywords

    Option; Volatility; Jump diffusion model; Intervention; Opce; Volatilita; Model se skoky; Intervence;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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