Pricing derivatives when a Peg is pre-announced : EMU Ins and cross market arbitrage

Jean-Marc Bottazzi, CERMSEM
Andreas Hueffman

Résumé. On développe ici un cadre pour l'évaluation de produits dérivés de change et de taux adapté à la phase finale d'une union monétaire, quand les parités sont connues ex-ante (mais l'entrée n'est pas certaine).
Mots clés : Pricing, union monétaire, arbitrage.

Abstract. The chosen final convergence mecanism for EMU has been to pre-annouce the target convergence rate of Ins : ERM central parity. This paper analyses some of the pricing implications that financial actors faced at that time - the institutional details of convergence affect the pricing of FX and interest rate derivatives and will be also important for future monetary unions. In particular the smile of FX options is dramatically affected, and FX and interest rate derivatives are strongly related.
Keywords : Incomplete markets, transverse assets, generic existence, equilibrium.

JEL Classification : C62, D50, D52.