Pricing Currency Risk: Facts and Puzzles from Currency Boards
The authors investigate the patterns and determinants of the currency risk premium in two currency boards-Argentina and Hong Kong. Despite the presumed rigidity of currency boards, currency premium is almost always positive and at times very large....
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| Language: | English en_US |
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World Bank, Washington, D.C.
2013
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| Online Access: | http://documents.worldbank.org/curated/en/2002/03/1744003/pricing-currency-risk-facts-puzzles-currency-boards http://hdl.handle.net/10986/14317 |
| Summary: | The authors investigate the patterns and
determinants of the currency risk premium in two currency
boards-Argentina and Hong Kong. Despite the presumed
rigidity of currency boards, currency premium is almost
always positive and at times very large. Its term structure
is usually upward sloping, but flattens out or even becomes
inverted at times of turbulence. Currency premia differ
across markets. The forward discount typically exceeds the
currency premium derived from interbank rates, particularly
during times of crisis. The large magnitude of these
cross-market differences can be the consequence of
unexploited arbitrage opportunities, market segmentation, or
other risks embedded in typical measures of currency risk.
The premium and its term structure depend on domestic and
global factors related to devaluation expectations and risk perceptions. |
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