The discontinuation of the EUR/CHF minimum exchange rate in January 2015: was it expected?
BIS Working Papers No 652
We derive risk-neutral probability densities for future euro/Swiss franc exchange rates as implied by option prices. We find that the credibility of the Swiss franc floor somewhat decreased as the spot exchange rate approached the lower bound of 1.20 CHF per euro. We also compare the forecasting performance of a random walk benchmark model with an error-correction model (ECM) augmented with option-implied break probabilities of breaching the currency floor. We find some evidence that the augmented ECM has an informational advantage over the random walk when using one-month break probabilities. But we find that one-month option-implied densities cannot predict the entire range of exchange rate realizations.
JEL classification: C53, F31, F37
Keywords: Swiss franc, forecasting, options, risk-neutral probability densities