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

Hertrich, Markus and Zimmermann, Heinz. (2015) On the Credibility of the Euro/Swiss Franc Floor: A Financial Market Perspective. WWZ Working Papers, 2015 (09).

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Official URL: https://edoc.unibas.ch/61327/

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Abstract

The sheer existence of EUR/CHF put options with strike prices below the EUR/CHF 1.20 ?oor, trading at non-zero cost, challenged the full credibility of the Swiss National Bank (SNB) in enforcing the lower barrier implemented in September 6, 2011 and abandoned on January 15, 2015. We estimate the risk-neutral break probabilities of a realignment of the ?oor from market prices of put options, using an extension of the Veestraeten option pricing model which assumes that the underlying security price exhibits a lower barrier. We estimate probabilities considerably di?erent from zero, even when the exchange rate traded far above the EUR/CHF 1.20 ?oor. We observe a drastic increase in the break-probabilities after August 2014, reaching a level of nearly 50%. The credibility of the SNB in maintaining the ?oor, as seen from the option market, was thus substantially lower than publicly claimed.
Faculties and Departments:06 Faculty of Business and Economics > Departement Wirtschaftswissenschaften > Professuren Wirtschaftswissenschaften > Finanzmarkttheorie (Zimmermann)
12 Special Collections > WWZ Publications > WWZ Discussion Papers and Working Papers
UniBasel Contributors:Zimmermann, Heinz and Hertrich, Markus
Item Type:Working Paper
Publisher:WWZ, University of Basel
Number of Pages:17
Note:Publication type according to Uni Basel Research Database: Discussion paper / Internet publication
Language:English
Identification Number:
  • handle: RePEc:bsl:wpaper:2015/09
Last Modified:07 Mar 2018 13:19
Deposited On:07 Mar 2018 13:19

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