Market Perceptions of Exchange Rate Risk

Michelle Lewis

No AN2012/12, Reserve Bank of New Zealand Analytical Notes series from Reserve Bank of New Zealand

Abstract: The prices for foreign exchange options allow us to extract information on implied market perceptions of future exchange rate risk. This note illustrates the techniques, looking at the behaviour of the New Zealand dollar over recent years. Our analysis suggests that the behaviour of the NZD/USD market has changed significantly since the global financial crisis. During the crisis, markets became increasingly uncertain and the balance of risks changed significantly with the market placing much more weight on the chance of depreciation than of appreciation. Although volatility in the NZD/USD is currently quite low, the market continues to price significantly more risk of depreciation than of appreciation.

Pages: 16 p.
Date: 2012-12
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