The predictive power of dollar-real call optionsimplied volatility

Resumo

Previous empirical researches pointed out the relation between stress events in financial markets and implied volatility in option prices, indicating that large movements in asset prices would be preceded by significant increases in implied volatility. In this short paper, I will test the predictive power of USS-R$ call options implied volatility regarding the huge exchange rate devaluation in Brazil in January of 1999. Furthermore, I analyse the issue of whether US$-RS call options implied volatility may be considered as a better estimator of largemagnitude returns than standard time series models. Finally, I analyse whether there is rationality in Brazilian derivatives market.