Implied volatility of foreign exchange options: is it worth tracking?

Market analysts and central banks often use the implied volatility of FX options as an indicator of expected exchange rate uncertainty. The aim of our study is to investigate the limits of this statistic. We present some key factors that may deviate the value of implied volatility from the exchange rate variability expected by the market. These biasing factors are linked to the simplifying assumptions of the Black-Scholes option pricing model. Our empirical results show that forint/euro implied volatilities carry useful information about future exchange rate uncertainty when the forecast horizon is shorter than one month. However, implied volatility provides a biased estimate, and does not encompass the information included in other (GARCH, ARMA) predictors of volatility calculated from historical exchange rate data. These results are in line with the findings of similar analyses of other currency pairs.option, volatility, exchange rate.

The effect of the MNB’s communication on financial markets

Our paper aims to assess how the Magyar Nemzeti Bank’s communication affects financial asset prices. We find that the central bank plays the most important role in influencing long-term yields. The effect on the exchange rate is less pronounced, while short-term yields are influenced only by the communication related to the exchange rate. Analysing the direction and channels of communication we observe two asymmetries. The central bank is more successful in signalling monetary policy tightening than easing and with the increase of time horizon the written communication gains in importance and dominates the verbal forms.communication, transmission mechanism.

Whom should we believe? Information content of the yield curve and analysts’ expectations

Expectations of market participants play an important role in monetary policy making. The main reason for this is that expectations influence the behaviour of investors and prices in financial markets. In this article, we present two sources of information on the expectations of financial market participants regarding the central bank’s policy rate. Both the yields of government securities and the survey of interest rate expectations conducted by Reuters contain information on what the market expects the future path of the policy rate to be, but sometimes these two sources of information convey substantially different messages. Our analysis helps to understand this phenomenon by shedding light on two key factors behind it. On the one hand, forward rates calculated from the yield curve contain a risk premium and exceed the expected value of the future central bank policy rate. On the other hand, analysts in the Reuters’ survey report the most likely value of the future central bank policy rate as their forecasts, instead of the average value of all possible scenarios. Finally, we claim that if the information from the two sources is interpreted properly – taking into account the previous factors – both sources contain valuable information for monetary policy making.Forecast efficiency, risk premia, survey expectations.

Measuring interest rate expectations from market yields: topical issues

Learning market participants’ policy rate expectations is a major issue for central banks. The underlying reason for this is that the interest rate expectations of market participants may themselves contain information on market participants’ perceptions of the economic prospects, which decision-makers might want to incorporate into their own assessment of the outlook. Market participants’ expectations, however, cannot be observed directly and are difficult to quantify. Of the two most common approaches, we will discuss in detail the one where we infer market expectations from the prices of the financial instruments which are closely related to expectations. In properly functioning, liquid markets we can infer market participants’ expectations of future interest rates from the prices of and returns on government securities and inter-bank transactions. Before the onset of the financial crisis, BUBOR (Budapest Inter-bank Offered Rate) reflected market participants’ expectations of the interest rate relatively reliably, but since the deepening of the crisis, this has changed for a number of reasons, which we will also seek to pinpoint. The fact that BUBOR no longer reflects real market expectations, i.e. it distorts them, is all the more important as this measure serves as a benchmark rate for other financial products, among other things, for corporate loans. The loss of the information content of BUBOR means that the yield curve derived from returns on inter-bank market instruments provides a more accurate measure of market expectations if we exclude data on BUBOR fixings. Nevertheless, forward rate agreements (FRAs) settled on BUBOR remain suitable for the quantification of market participants’ expectations. However, in interpreting these, it is important that, in addition to credit and liquidity risk premia, the bias caused by BUBOR should also be taken into consideration.interest rates, expectations, financial markets, monetary policy.

Implied volatility of foreign exchange options: Is it worth tracking?

Market analysts and central banks often use the implied volatility of FX options as an indicator of expected exchange rate uncertainty. The aim of our study is to investigate the limits of this statistic. We present some key factors that may deviate the value of implied volatility from the exchange rate variability expected by the market. These biasing factors are linked to the simplifying assumptions of the Black-Scholes option pricing model. Our empirical results show that forint/euro implied volatilities carry useful information about future exchange rate uncertainty when the forecast horizon is shorter than one month. However, implied volatility provides a biased estimate, and does not encompass the information included in other (GARCH, ARMA) predictors of volatility calculated from historical exchange rate data. These results are in line with the findings of similar analyses of other currency pairs

Macroeconomic announcements, communication and order flow on the Hungarian foreign exchange market

We investigate the relation between the EUR/HUF exchange rate on the one hand and news announcements and order flow on the other hand using intraday data. We extend the existing literature on foreign exchange market microstructure by considering a small open transition economy. We find that the intraday exchange rate – independent from whether we focus on the mean or the volatility – depends on both news announcements and order flow. We conclude that news on the EUR/HUF market are transmitted directly via immediate reactions to news announcements as well as indirectly via order flow. We decompose the news’ total effect on exchange rate and find that order flow accounts for approximately three quarters, compared to one quarter for direct news impact. Although the HUF has been pegged to the EUR, the exchange rate reacts qualitatively very similarly to exchange rates of major currencies as reported in the literature, but quantitatively we observe a remarkable difference: the share of the indirect channel is higher on the EUR/HUF market. Furthermore we extend the commonly used news by communication of central bankers and significantly improve the explanatory power of the regressions. Our results imply that macroeconomic and microstructure variables together can explain a non-negligible part of high frequency exchange rate movements and central bank communication is an important determinant of the EUR/HUF rate.microstructure, order flow, exchange rate, macroeconomic news, central bank communication.

The effect of the MNB's communication on financial markets

Our paper aims to assess how the Magyar Nemzeti Bank’s communication affects financial asset prices. We find that the central bank plays the most important role in influencing long-term yields. The effect on the exchange rate is less pronounced, while short-term yields are influenced only by the communication related to the exchange rate. Analysing the direction and channels of communication we observe two asymmetries. The central bank is more successful in signalling monetary policy tightening than easing and with the increase of time horizon the written communication gains in importance and dominates the verbal forms

Szöveges feladatok tanításának új módszerei

A szöveges feladatok megoldása minden szinten sok nehézséget okoz a tanulóknak, ezért a matematikatanítás egyik fontos kérdése, hogyan érhetjük el, hogy a tanulók sikeresek legyenek ebben a témában is. A szöveges feladatok tanításával fejlődik a tanulók problémamegoldó képessége, szövegértése, összefüggéslátása, következtetési képessége, számolási és becslési készsége. A szöveges feladatok kapcsolatot jelentenek a matematika és a hétköznapi élet, sőt gyakran más tantárgyak között is. Ezért lényeges, hogy a matematikát tanítók fel tudják építeni a szöveges feladatok tanításának lépéseit, tudjanak maguk is feladatokat válogatni, különböző témákban feladatokat alkotni, és ismerjenek olyan módszereket, amelyek alkalmazásával a gyerekek szövegesfeladat-megoldó képessége fejlődhet. Ehhez igyekszünk segítséget nyújtani ebben az írásban