Some market observers attribute the dollar's recent drop against the mark and yen to a type of currency option known as the knockout option. Although knockouts did contribute modestly to the dollar's fall, their full impact was felt to a much greater extent in the option markets.

This paper describes a method of extracting the risk-neutral probability distribution of future exchange rates from option prices. In foreign exchange markets interbank option pricing conventions make possible reliable inferences about risk-neutral probability distributions with relatively...

This paper examines the performance of implied correlations in forecasting subsequently realized correlations between exchange rates. Implied correlations are derived from sets of implied volatilities on the three exchange rates in a currency trio. We compare the forecasting performance of the...

Remarks at New York University's Stern School of Business, New York City.