Central Bank Foreign Exchange Market Intervention And Option Contract Specification: The Case of Colombia

Topics:
World Bank
Tags:
Asset Management,
Bank,
Business Operations,
Financial Services,
Intervention,
Operational Planning,
Option,
Specification
Source:
International Monetary Fund

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Overview: This article aims to identify appropriate option contract specification for effective central bank exchange market intervention. Option contract specification determines the impact of options on the underlying asset or currency, and hence, their actual effect on asset price or currency volatility and are therefore key in determining the effectiveness of option-based intervention. The paper reviews the experience the systematic option-based foreign exchange market intervention of the central bank of Columbia and finds that its contract has only been moderately successful at abating exchange rate volatility, which is attributed to sub-optimal specification.

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Format: PDF | Size: 514KB | Date: Jun 2003 | Pages: 17

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