Is It Possible to Replicate the Exchange Rate Volatility Behavior Using Dynamic Strategies?

Ronny Kim Woo (), José Valentim Machado Vicente () and Claudio Henrique Barbedo ()
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Ronny Kim Woo: IBMEC
José Valentim Machado Vicente: Banco Central do Brasil e IBMEC
Claudio Henrique Barbedo: Banco Central do Brasil e IBMEC

Brazilian Review of Finance, 2009, vol. 7, issue 4, 485-501

Abstract: The implied volatility is certainly an interesting indicator to help get a sense of the market, because it represents the amount of expected volatility the market is pricing. In over-the-counter exchange rate option, whose trading is volatility oriented, it is the most important variable. This work investigates whether information embedded in this implied volatility market are explained by other traded variables in the Brazilian market. The results show that there are sources of non-negotiable risk that influence this implied volatility. Therefore, exchange rate implied volatility can assist to understand the behavior of the derivatives indexed to dollar.

Keywords: implied volatility; exchange rate option; principal components. (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:brf:journl:v:7:y:2009:i:4:p:485-501

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