On the Credibility of the Euro/Swiss Franc Floor: A Financial Market Perspective

Markus Hertrich and Heinz Zimmermann ()
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Heinz Zimmermann: University of Basel

Working papers from Faculty of Business and Economics - University of Basel

Abstract: The sheer existence of EUR/CHF put options with strike prices below the EUR/CHF 1.20 ?oor, trading at non-zero cost, challenged the full credibility of the Swiss National Bank (SNB) in enforcing the lower barrier implemented in September 6, 2011 and abandoned on January 15, 2015. We estimate the risk-neutral break probabilities of a realignment of the ?oor from market prices of put options, using an extension of the Veestraeten option pricing model which assumes that the underlying security price exhibits a lower barrier. We estimate probabilities considerably di?erent from zero, even when the exchange rate traded far above the EUR/CHF 1.20 ?oor. We observe a drastic increase in the break-probabilities after August 2014, reaching a level of nearly 50%. The credibility of the SNB in maintaining the ?oor, as seen from the option market, was thus substantially lower than publicly claimed.

Keywords: currency options; central banking; credibility; Euro/Swiss franc floor; Vanna-Volga method; barrier (search for similar items in EconPapers)
JEL-codes: E42 E58 F31 G13 (search for similar items in EconPapers)
Date: 2015-09-01
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Journal Article: On the Credibility of the Euro/Swiss Franc Floor: A Financial Market Perspective (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:bsl:wpaper:2015/09

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