The options market can help us understand how events affect currency expectations and uncertainty. In today’s post, we look back and estimate how market expectations of the future value of the USDZAR shifted around the time of the 2024 Budget Review. Options-implied USDZAR expectations did not shift much by market close on the day of the Budget Review. However, over the following days, the mean of the options-implied USDZAR distribution shifted rightwards, indicative of a higher implied point estimate of the future value of the ZAR over the next 3 months. There was also a slight fattening of the right tail of the distribution, suggesting that the market participants expected that values of the ZAR were more likely to remain above their mean over the coming months than to fall to values below it.
Footnote: Estimated using the approach of Malz, A. M. (1997). Option-implied probability distributions and currency excess returns. Staff reports, Federal Reserve Bank of New York. See this paper for more detail of the methodology used, and this paper by Michelle Lewis for more discussion on using option pricing to gauge market expectations.
