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Lecture on "Option Prices of Pegged Exchange Rates: the HKD-USD Puzzle"
DateandTime: 2018-12-17 17:49:50

Speaker: Dr. Samuel Drapeau, Distinguished Researcher Fellow at Shanghai Jiao Tong University

Date: December 18, 2018

Time: 4:30 p.m. to 5:30 p.m.

Location: Room1238, Block B, Zhixin Building, Central Campus


Foreign exchange markets are by far the largest markets in the world in terms of volume.Option pricing there relies on the principle that the underlying -- the exchange rate -- is a free floating one for which the classical Black and Scholes and derivates thereof are used.It is an interesting fact that many foreign exchange markets are eventually pegged -- Bulgaria, China, Hong-Kong, Switzerland, Thailand -- at least for a long periods of time. Surprisingly, even though the underlying is fixed, there is an active option market taking place on those currencies. We document this puzzling fact and propose a simple model to explain it.Taking as classical example the Hong-Kong/US dollars pegged exchange, we calibrate this model over 10 years of option data and provide some insights on what could be the motivation of agents on this markets to trade such options. This is a joint work with Tan Wang and Tao Wang from Shanghai Advanced Institute of Finance.

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Edited by: Xie Tingting

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