Get 20M+ Full-Text Papers For Less Than $1.50/day. Subscribe now for You or Your Team.

Learn More →

Use of Currency Options to Enhance Exchange Rate Forecasts

Use of Currency Options to Enhance Exchange Rate Forecasts Since the early 1980s, currency options have become a popular means for hedging foreign currency positions or speculating on anticipated movements in exchange rates. Yet, they can also be used to enhance the forecasting of exchange rates. Corporate forecasts of exchange rates involve two tasks 1 a point estimate of a currency's exchange rate, and 2 a confidence interval that suggests the degree of uncertainty associated with the point estimate forecast. A currency forward or futures price is often used as the point estimate required. The confidence interval is commonly developed by using the historical volatility of exchange rate movements. However, an alternative method is to use the market's anticipated volatility in developing the confidence interval. Scott and Tucker 1990 have shown that the volatility implied from contemporaneous currency option prices is a better forecast of future volatility than historical measures. Therefore, a confidence interval implied by currency options should also be more reliable. Our objective is to illustrate how confidence intervals can be developed from currency option information. Given the degree of difficulty in forecasting exchange rates, more reliable confidence intervals could greatly improve managerial decisions. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Managerial Finance Emerald Publishing

Use of Currency Options to Enhance Exchange Rate Forecasts

Managerial Finance , Volume 17 (4): 4 – Apr 1, 1991

Loading next page...
 
/lp/emerald-publishing/use-of-currency-options-to-enhance-exchange-rate-forecasts-5Zh0EgC6rV

References (16)

Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
0307-4358
DOI
10.1108/eb013677
Publisher site
See Article on Publisher Site

Abstract

Since the early 1980s, currency options have become a popular means for hedging foreign currency positions or speculating on anticipated movements in exchange rates. Yet, they can also be used to enhance the forecasting of exchange rates. Corporate forecasts of exchange rates involve two tasks 1 a point estimate of a currency's exchange rate, and 2 a confidence interval that suggests the degree of uncertainty associated with the point estimate forecast. A currency forward or futures price is often used as the point estimate required. The confidence interval is commonly developed by using the historical volatility of exchange rate movements. However, an alternative method is to use the market's anticipated volatility in developing the confidence interval. Scott and Tucker 1990 have shown that the volatility implied from contemporaneous currency option prices is a better forecast of future volatility than historical measures. Therefore, a confidence interval implied by currency options should also be more reliable. Our objective is to illustrate how confidence intervals can be developed from currency option information. Given the degree of difficulty in forecasting exchange rates, more reliable confidence intervals could greatly improve managerial decisions.

Journal

Managerial FinanceEmerald Publishing

Published: Apr 1, 1991

There are no references for this article.