On the Credibility of the Euro/Swiss Franc Floor: A Financial Market Perspective

We estimate the risk-neutral break probabilities of a realignment of the EUR/CHF 1.20 floor, maintained by the SNB from September 6, 2011, to January 15, 2015, using put options and an option pricing model, which assumes a lower barrier for the exchange rate. We estimate probabilities considerably different from zero, even when the exchange rate traded far above the floor.We observe a drastic increase in the break probabilities up to approximately 50% shortly before the floor was abandoned. From an Option market perspective, the credibility of the SNB in maintaining the floor was, thus, substantially lower than publicly claimed.