Emilio Zarruk and Armand Picou
The 1987 Single European Act's intended goal is to unify European member nations. The Act provides a series of steps over time that dismantles the various trade barriers between…
Abstract
The 1987 Single European Act's intended goal is to unify European member nations. The Act provides a series of steps over time that dismantles the various trade barriers between the European Economic Community (EEC) members. The main economic reforms, reduced trade and increased capital flows, combine disparate goals and government policies to enhance the economic efficiency of EEC members. The EEC economic system is therefore changing to create a globally competitive community of nations with efficient internal trade and capital markets.
Jeff Madura, Alan L. Tucker and Emilio Zarruk
Since the early 1980s, currency options have become a popular means for hedging foreign currency positions or speculating on anticipated movements in exchange rates. Yet, they can…
Abstract
Since the early 1980s, currency options have become a popular means for hedging foreign currency positions or speculating on anticipated movements in exchange rates. Yet, they can also be used to enhance the forecasting of exchange rates. Corporate forecasts of exchange rates involve two tasks: (1) a point estimate of a currency's exchange rate, and (2) a confidence interval that suggests the degree of uncertainty associated with the point estimate forecast. A currency forward or futures price is often used as the point estimate required. The confidence interval is commonly developed by using the historical volatility of exchange rate movements. However, an alternative method is to use the market's anticipated volatility in developing the confidence interval. Scott and Tucker (1990) have shown that the volatility implied from contemporaneous currency option prices is a better forecast of future volatility than historical measures. Therefore, a confidence interval implied by currency options should also be more reliable. Our objective is to illustrate how confidence intervals can be developed from currency option information. Given the degree of difficulty in forecasting exchange rates, more reliable confidence intervals could greatly improve managerial decisions.