Modelling the US Dollar Trading Range – Bounds from the risk neutral measure

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Authors
  1. Maybury, D.W.
Corporate Authors
Defence R&D Canada - Centre for Operational Research and Analysis, Ottawa ON (CAN)
Abstract
ADM(Fin CS) and senior decision makers at the Department of National Defence (DND) require insight into financial risks stemming from foreign exchange obligations in procurements and program delivery. We implement three popular derivative based quantitative financial models which provide the conditional Canada-US exchange rate trading range, under the risk neutral distribution, within a 95% confidence region up to a one year horizon. ADM(Fin CS) can use the model inferred trading range to help decide on a hedging rule in connection with foreign exchange budget obligations. Our results give a useful thumbnail sketch of the underlying probability distribution and confidence regions but, to gain a better understanding of foreign exchange market conditions, we require access to over-the-counter derivative data. Finally, ADM(Fin CS) staff can use the derived trading range in DND’s foreign exchange reporting documents and internal monitoring services.

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Report Number
DRDC-CORA-TM-2013-086 — Technical Memorandum
Date of publication
01 Jun 2013
Number of Pages
52
DSTKIM No
CA037864
CANDIS No
537703
Format(s):
Electronic Document(PDF)

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