The Information Content in the Offshore Renminbi Foreign-Exchange Option Market: Analytics and Implied USD/CNH Densities

41 Pages Posted: 31 Oct 2017 Last revised: 18 Jan 2018

See all articles by Michael Funke

Michael Funke

University of Hamburg - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Julius Loermann

University of Hamburg - Department of Economics

Andrew Tsang

Hong Kong Monetary Authority

Date Written: October 23, 2017

Abstract

In line with the deepening of the derivative foreign-exchange market in Hong Kong, we recover risk-neutral probability densities for future US dollar/offshore renminbi exchange rates as implied by exchange rate option prices. The risk-neutral densities (RND) approach is shown to be useful in analyzing market sentiment and risk aversion in the renminbi market. We include a forecasting exercise that confirms market participants were able to forecast the shape of the actual densities correctly for short horizons, even if their exact location could not be determined.

Keywords: offshore renminbi, options, risk-neutral densities, real-world densities, forecasting

JEL Classification: C53, F31, F37

Suggested Citation

Funke, Michael and Loermann, Julius and Tsang, Andrew, The Information Content in the Offshore Renminbi Foreign-Exchange Option Market: Analytics and Implied USD/CNH Densities (October 23, 2017). BOFIT Discussion Paper No. 15/2017. Available at SSRN: https://ssrn.com/abstract=3062512

Michael Funke (Contact Author)

University of Hamburg - Department of Economics ( email )

Von-Melle-Park 5
room 2128 C rise
Hamburg, 20146
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Julius Loermann

University of Hamburg - Department of Economics ( email )

Von-Melle-Park 5
room 2128 C rise
Hamburg, 20146
Germany

Andrew Tsang

Hong Kong Monetary Authority ( email )

55/F, Two International Finance Centre
Hong Kong
Hong Kong

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