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. 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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Bibliographic Details
Main Authors: Schmukler, Sergio L., Servén, Luis
Language:English
en_US
Published: World Bank, Washington, D.C. 2002-03
Subjects:ARBITRAGE, ARGENTINE PESO, ASSETS, BANK DEPOSITS, BANK FOR INTERNATIONAL SETTLEMENTS, BENCHMARK, BONDS, BORROWING COSTS, BRAZILIAN REAL, CANADIAN DOLLAR, CAPITAL ACCOUNT, CAPITAL CONTROLS, CAPITAL MARKETS, CENTRAL BANK, COMMON CURRENCY, CONVERTIBILITY, COST OF CAPITAL, CURRENCY, CURRENCY ASSETS, CURRENCY BOARD, CURRENCY BOARDS, CURRENCY CRISES, CURRENCY PEGS, CURRENCY PREMIUM, CURRENCY RISK, DEBT, DEFAULT RISK, DEVALUATION, DOMESTIC INTEREST RATES, ECONOMIC ACTIVITY, ECONOMIC DIMENSION, ECONOMIC PERFORMANCE, ECONOMIC SITUATION, EMERGING COUNTRIES, EMERGING ECONOMIES, EMERGING MARKETS, EURO, EUROPEAN MONETARY SYSTEM, EXCHANGE OPTIONS, EXCHANGE RATE, EXCHANGE RATE CHANGES, EXCHANGE RATE DETERMINATION, EXCHANGE RATE REGIME, EXCHANGE RATE REGIMES, EXCHANGE RATE RISK, EXCHANGE RISK, EXPENDITURES, FEDERAL RESERVE BANK OF NEW YORK, FINANCIAL CRISES, FINANCIAL DATA, FINANCIAL STABILITY, FINANCIAL SYSTEM, FLOATING EXCHANGE RATES, FORECASTS, FOREIGN CURRENCY, FOREIGN EXCHANGE, FOREIGN EXCHANGE MARKET, FOREIGN EXCHANGE MARKETS, FOREIGN EXCHANGE SETTLEMENT RISK, FOREIGN EXCHANGE SWAPS, FOREIGN EXCHANGE TRANSACTIONS, FORWARD EXCHANGE, GOVERNMENT BONDS, HONG KONG DOLLARS, HONG KONG MONETARY AUTHORITY, ILLIQUIDITY, INDONESIAN RUPIAH, INDUSTRIAL ECONOMIES, INFLATION, INFLATION PERFORMANCE, INTEREST RATE, INTEREST RATES, INTERNATIONAL BANKS, INTERNATIONAL FINANCE, JAPANESE YEN, KOREAN WON, LIQUIDITY, LOCAL CURRENCY, LONG TERM, MACROECONOMICS, MARKET VALUE, MATURITIES, MONEY MARKET, OUTPUT, OUTPUT GROWTH, OUTPUT VOLATILITY, PEGS, PERUVIAN SOL, PESOS, POLICY MAKERS, POLICY RESEARCH, PRIVATE SECTOR, REAL INTEREST, RISK AVERSE, RISK AVERSION, RISK PREMIA, RISK PREMIUM, RUSSIAN RUBLE, SCENARIOS, SECURITIES, SOLVENCY, SPOT EXCHANGE RATES, TAXATION, THAI BAHT, TRANSACTION COSTS, TRANSACTIONS COSTS, VOLATILITY CURRENCY BOARDS, MARKET SEGMENTATION, FORWARD EXCHANGE RATES, MONEY MARKET FUNDS,
Online Access:http://documents.worldbank.org/curated/en/2002/03/1744003/pricing-currency-risk-facts-puzzles-currency-boards
https://hdl.handle.net/10986/14317
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