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
Date Written: October 23, 2017
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: Suggested Citation