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how can we estimate the impact of a exchange rate regime switch ( from fixed to float) on the options prices i'm talking about the moroccan case (EUR/MAD USD/MAD) options OTC , is there any stochastic model for this ? thanks in advance

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MAD has been pegged to a basket of EUR and USD. Recently the weight of EUR in the basket has been decreased in favor of USD, and there is discussion of making the exchange rate float more freely still.

A regime change often involves a jump of the spot exchange rate simultaneously to a jump in the volatility. There are some such models even with analytic tractability : see the Duffie, Pan, & Singleton SVJ-Y-V model [1] for instance. Estimating or calibrating such a complicated model for MAD may be unrealistic however. There are lots of parameters and not so much good data to estimate from.

A simpler model that might do well is the Merton jump diffusion [2]. That has only jumps in spot, not vol, but the impact of spot jumps is bigger on vanillas anyway. And that model is only 4 parameters to estimate, something you might calibrate to some vanilla quotes maybe with a fixed guess for the jump arrival rate.

[1] http://pages.stern.nyu.edu/~dbackus/Disasters/DuffiePanSingleton%20jumps%20Econometrica%2000.PDF

[2] http://www.qfrc.uts.edu.au/research/research_papers/rp287.pdf

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  • $\begingroup$ The problem is that , the process of changing from pegged to floating regime will start with widening the upper and lower boundaries between which the exchange rate could float , but i want to understand what's the consequences of floating rate on the pegs are weights will be unstable ? Thanks for the answer $\endgroup$ – SquaredCircle Mar 2 '17 at 14:35

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