50,000 of fair value that arose through increased share prices after entering into the currency hedge). Aitan Goelman, the CFTC’s Director of Enforcement, stated: “The setting of a benchmark rate is not simply another opportunity for banks to earn a profit.
Countless individuals and companies around the world rely on these rates to settle financial contracts, and this reliance is premised on faith in the fundamental integrity of these benchmarks.
I also explain the three sources of information about market expectations and perception of risk that can be extracted from FX option prices and review empirical methods for extracting option-implied densities of future exchange rates.
As an illustration, I conclude the Chapter by investigating time series dynamics of option-implied measures of FX risk vis-a-vis market events and US government policy actions during the period January 2007 to December 2008.
As required by the Commodity Exchange Act, the rule includes requirements for conducting retail forex transactions with respect to disclosure, recordkeeping, capital and margin, reporting, business conduct, and documentation.
Then, we document a finding that the stock variance risk premium can also predict the exchange rate return at a short 1-month horizon.
Thus, currency and stock variance risk premiums seem to contain differential information content for the exchange rate return.
Although this finding is to be expected, expectations and risk have been largely ignored in empirical exchange rate modeling.
Using daily options data for six major currency pairs, we first show that the cross section options-implied standard deviation, skewness and kurtosis consistently explain not only the conditional mean but also the entire conditional distribution of subsequent currency excess returns for horizons ranging from one week to twelve months.
Options are typically portrayed as a form of financial insurance, no less useful than property and casualty insurance.