TY  - JOUR
AU  - Schmukler,Sergio L.
AU  - Serven,Luis
TI  - Pricing Currency Risk: Facts and Puzzles from Currency Boards
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 9047
PY  - 2002
Y2  - July 2002
UR  - http://www.nber.org/papers/w9047
L1  - http://www.nber.org/papers/w9047.pdf
N1  - Author contact info:
Sergio Schmukler
The World Bank
MSN MC3-301
1818 H Street, N.W.
Washington, DC 20433
Tel: 202-458-4167
Fax: 202-522-3518
E-Mail: Sschmukler@worldbank.org

Luis Serven
The World Bank
1818 H St NW
Washington DC 20433
Tel: 202 473 7451
E-Mail: lserven@worldbank.org
AB  - Hard pegs, such as currency boards, intend to reduce or even eliminate currency risk. This paper investigates the patterns and determinants of the currency risk premium in two currency boards -- Argentina and Hong Kong. Despite the presumed rigidity of currency boards, the currency premium is almost always positive and at times very large. Its term structure is usually upward sloping, but flattens out or even becomes inverted at times of turbulence. Currency premia differ across markets. The forward discount typically exceeds the currency premium derived from interbank rates, particularly during crisis times. The large magnitude of these cross-market differences can be the consequence of unexploited arbitrage opportunities, market segmentation, or other risks embedded in typical measures of currency risk. The premium and its term structure depend on domestic and global factors, related to devaluation expectations and risk perceptions.
ER  -