This paper focuses on the usefulness of option prices as an in formation variable for monetary policy implementation. Derivative markets provide monetary authorities with a rich source of information for gauging market sentiment. A forward or futures price is the market's expectation of the future value of an asset. In case of option prices, it can provide richer information than other financial derivatives. It provides dispersion as well as mean of the market participant's expectation on future asset prices. A set of option prices provide us with information on the whole probability distribution of the future values of underlying assets. The paper surveyed the methods to extract risk-neutral probability density function of underlying asset from option prices. The paper also implemented empirical test using KOSPI 200 stock option prices and found that it's very useful for gauging market sentiments.
