Opinion

Felix Salmon

The option value of coinage

By Felix Salmon
April 7, 2009

Is that a coin in your pocket, or is it a unit of long base metal with an embedded American put option with infinite time to maturity? According to a new paper by Espen Haug and John Stevenson, it’s both. And what’s more, that embedded put is highly volatile:

The value of modern currencies has recently gone from deep in-the-money through at-the-money to deeply out-of- the-money to deep in-the-money again, making the lack of sound analytical treatment all the more surprising.

Haug and Stevenson conclude that central banks should bone up on their option theory before minting new coins:

If the US Mint and other central banks had been fully aware of the embedded option they are issuing in their physical money they may have acted differently in the past.

Don’t they know that they’re giving these options away?

Comments
6 comments so far | RSS Comments RSS

Hi, Felix,

You have posted some great articles on this blogs.

I am starting something on current crisis articles too. How can I get them posted here? Thanks for advice.

John

Posted by John | Report as abusive
 

If inflation gets out of control, private reverse seignorage should provide an automatic stabilizer.

 

Inflation out of control. Any specific percentage?

Posted by More Than Once | Report as abusive
 

Don’t they know that they’re giving these options away?

Yup. http://www.usatoday.com/money/2006-12-14 -melting-ban-usat_x.htm

 

“Don’t they know that they’re giving these options away?

Yup. http://www.usatoday.com/money/2006-12-14 -melting-ban-usat_x.htm ”

And this is described in the paper, and suggested to be considered as some type of of knock-out option.

Posted by trader | Report as abusive
 

“Here academics in their famous models” — ah so it’s actually a cod-science paper. Did you think you were going to fool us? Did you think none of us would get as far as the third page?

I’m no economist and no historian, but I do recall that when people starting melting down coin of the realm, and when the sovereign responded by debasing the coinage, things usually ended badly for that particular sovereign….

Posted by Ian Kemmish | Report as abusive
 

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
  •