Dollar jump fears, 1984–1992: distributional abnormalities implicit in currency futures options

Abstract

Deutsche mark and yen futures options over 1984–1992 and 1986–1992, respectively, are examined for deviations from the lognormal assumption underlying standard option pricing models. Two methods are used: an atheoretic ‘skewness premium,’ and daily estimates of moments using a model for pricing American foreign currency futures options under systematic exchange rate jump risk. Substantial variation over time is found in all moments, including implicit skewness and kurtosis. The implicit abnormalities predict future abnormalities in log-differenced $/DM futures prices, but not $/yen. The ‘peso problem’ implications do not explain standard rejections of uncovered interest parity.