The question is inspired by yesterday's (06/09/11) historic announcement by the Swiss National Bank that it would impose a ceiling on the franc of 1.20 against the euro.

I would like to know if there are any standard models to value currency options and quantos when the currency exchange rate is effectively capped by the central bank.

Could anyone point to good readable references? A quick web search did not show anything relevant.

  • $\begingroup$ I think nothing changes, oil price can't go under 40$ because it's the production price and the pricing isn't different, you're just going to have lower implied volatility under 1.20 strikes maybe. Anyway it's not a hard ceiling, Japanese say they would not let the yen go further up since October 2008, without effect. $\endgroup$
    – Lliane
    Sep 7 '11 at 13:52

I don't believe there are any models because it would be fruitless to develop one. Whenever central bank intervention looms large in currency markets, all the traditional models become much less relevant than trying to predict how the central bank will react to various scenarios. In this case, foreseeing the SNB's move to sell a significant quantity of short-dated gamma in an effort to get markets to help them enforce the ceiling would have been much more lucrative than application of any artificial model. Models must necessarily be estimated from historical data. The moves happening in the EUR/CHF market these days are completely outside the norms established over the last 10+ years of trading.


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