Existence of Crash Risk Premia in FX Optioner

Tomas Sanchez Barfod

Student thesis: Master thesis

Abstract

This thesis investigates crash risk premium in FX spot markets. Empirical studies of the FX Carry trade have shown that the strategy generates an excess return over time, which has been suggested to be a compensation for the Crash risk premium incured. Furthermore, studies have shown a that, even after hedging the crash risk premium, using FX options there is still an excess return, which suggest that the FX option are cheap. I reconcile past findings and evaluate the carry trade performance in currency basket that includes the Emerging Market currencies. My finding suggests that there is indeed a crash risk premium present in Currency markets. Furthermore, I arrive at the conclusion that especially FX options are indeed puzzlingly cheap in that they for the most part hedge a lot of the crash risk present in FX markets. Futhermore, there cheapness they help produce improve performance evaluated by gross sharpe ratio

EducationsMSc in Business Administration and Management Science, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2017
Number of pages79