We use exchange traded options on Canadian dollar futures to estimate the
market's risk-neutral distribution for the Canadian dollar in the days before
and after the Quebec sovereignty referendum. We employ a relatively new
technique that places little a priori structure on the estimated distribution.
This lack of structure allows the estimated distribution to reflect the
multi-modal nature of expectations associated with the referendum's results.
The technique is especially suited to circumstances in which a particular event
will reduce a large degree of uncertainty prior to the expiration date of the
options. Our estimated distributions are consistent with a significant
perceived probability that the Canadian dollar would move up or down by as much
as 5 percent as a result of the vote.
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Last update: July 19, 2001