During September 1992, options on ERM currencies with strike prices outside the ERM bands had positive values.
Question:
During September 1992, options on ERM currencies with strike prices outside the ERM bands had positive values. At the same time, actual currency volatility was close to zero.
a. Is there a paradox here? Explain.
b. Why might actual currency volatility have been close to zero? What does a zero volatility imply about the value of currency options?
c. What does the positive values of ERM options outside the bands tell you about the market’s perceptions of the possibility of currency devaluations or revaluations?
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a There is no paradox Although current volatility was almost zero currency traders were betting that ...View the full answer
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Related Book For 
Foundations Of Multinational Financial Management
ISBN: 9780470128954
6th Edition
Authors: Alan C Shapiro, Atulya Sarin
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