Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/123477
Authors: 
Hertrich, Markus
Zimmermann, Heinz
Year of Publication: 
2015
Series/Report no.: 
WWZ Working Paper 2015/09
Abstract: 
The sheer existence of EUR/CHF put options with strike prices below the EUR/CHF 1.20 floor, 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 floor 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 different from zero, even when the exchange rate traded far above the EUR/CHF 1.20 floor. 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 floor, as seen from the option market, was thus substantially lower than publicly claimed.
Subjects: 
currency options
central banking
credibility
Euro/Swiss franc floor
Vanna-Volga method
barrier
JEL: 
E42
E58
F31
G13
Document Type: 
Working Paper

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