Market Expectation of Appreciation of the Renminbi

24 Pages Posted: 20 Aug 2008 Last revised: 5 Jun 2018

See all articles by Cho-Hoi Hui

Cho-Hoi Hui

Hong Kong Monetary Authority - Research Department

Chi-Fai Lo

The Chinese University of Hong Kong

Tsz-Kin Chung

IHS Markit; Tokyo Metropolitan University

Date Written: August 20, 2008

Abstract

This paper proposes a path-dependent approach for estimating maximum appreciations of the renminbi expected by the market based on first-passage-time distributions. Using market data of the renminbi spot exchange rates, non-deliverable forward rates and currency option prices from 21 July 2005 (the reform of the exchange rate regime) to 28 February 2008 for model parameters, the maximum appreciations of the renminbi estimated under the proposed approach show that the market expected another large movement of the exchange rate during the 14 months after the reform. Subsequently, the few occasions of appreciations beyond the expected maximums coincided with the trade-related issues and speculations of greater momentum of appreciation allowed by the authorities. The PBoC's measures were however largely incorporated into the derivatives' prices. The proposed approach can be used to gauge the range of appreciations of the renminbi anticipated in the market and to identify any exchange rate movements beyond market expectations.

Keywords: renminbi exchange rate, first-passage-time distributions, currency options

JEL Classification: F31, G13

Suggested Citation

Hui, Cho-Hoi and Lo, Chi-Fai and Chung, Tsz-Kin, Market Expectation of Appreciation of the Renminbi (August 20, 2008). 21st Australasian Finance and Banking Conference 2008 Paper. Available at SSRN: https://ssrn.com/abstract=1240509 or http://dx.doi.org/10.2139/ssrn.1240509

Cho-Hoi Hui (Contact Author)

Hong Kong Monetary Authority - Research Department ( email )

Hong Kong
China

Chi-Fai Lo

The Chinese University of Hong Kong ( email )

Department of Physics
Shatin, N.T., Hong Kong
China

Tsz-Kin Chung

IHS Markit ( email )

Tokyo
Japan

Tokyo Metropolitan University

1-1 Minami Ohsawa Hachioji-shi
Tokyo 192-0397
Japan

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