Vincent Brousseau

The Spectrum of Euro-Dollar

The purpose of this study is to analyse the time series of the eurodollar exchange rate. This exchange rate is studied as if it was a continuous-time physical process, which implies that we systematically make use of different degrees of time resolution. The analysis takes into account various statistical indicators, but puts a special emphasis on the spectrum of the process. In other words, we consider the process of the returns of the euro-dollar exchange rate as produced by a superposition of oscillations with different frequencies and we try to determine the relative weight of those frequencies within the returns process. The spectrum of this process is the function giving those relative weights. We find that this spectrum has an identifiable pattern and we claim that this pattern is a core characteristic of the process. We simulate then a process having the same spectrum and compare the behaviours of actual process and of the simulated process in terms of various statistical indicators. We find that the simulated process provides a good, but not perfect, replication of the behaviour of the actual euro-dollar exchange rate.

Fixing the Fixings: What Road to a More Representative Money Market Benchmark?

Interest rate derivatives on major currencies, with notional outstanding amounts adding up to hundreds of trillions, are mostly indexed on Libor and Euribor benchmarks, as are hundreds of billions in loans to enterprises, mortgages and other retail loans to the real economy. Yet, the prevailing role of these benchmarks appears to be more a legacy from history rather than reflecting today?s structure of banks? funding. Building on earlier work (Brousseau, Chailloux, Durre, 2009), this paper discusses various options to move towards a new benchmarking system in the money market. It proposes a more ambitious benchmark design that would consist of a trade-weighted index that would systematically pool all short-term wholesale funding operations of banks per tenor.

The Implied Subsidy of Exchange Rate Mechanisms

This paper proposes an unconventional method for analyzing the cost of foreign exchange rate mechanisms using option pricing theory. The insurance coverage embedded in the exchange rate regime is analogous to a currency option (or a portfolio of currency options) whose pay-off can be explicitly calculated. The value of such option (or portfolio) can be considered a (shadow) subsidy. For example a target zone arrangement between two currencies is equivalent to a perpetual strangle (a portfolio consisting of a call and a put) with strike prices equal to the limits of the band. Analogously a fixed exchange rate is equivalent to a perpetual straddle (a portfolio consisting of a call and a put with the same strike prices). An exact evaluation of the subsidy depends on a number of hypotheses: this paper provides some estimates under different assumptions using an extension of the Garman (1987) formula for pricing perpetual currency options.