Central Bank Participation in Currency Options Markets /

This paper analyzes whether and how central banks can use currency options to lower exchange rate volatility and maintain (implicit) target zones in foreign exchange markets. It argues that selling rather than buying options will result in market makers dynamically hedging their long option exposure...

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Autor principal: Breuer, Peter
Format: Revista
Idioma:English
Publicat: Washington, D.C. : International Monetary Fund, 1999.
Col·lecció:IMF Working Papers; Working Paper ; No. 1999/140
Accés en línia:Full text available on IMF
Descripció
Sumari:This paper analyzes whether and how central banks can use currency options to lower exchange rate volatility and maintain (implicit) target zones in foreign exchange markets. It argues that selling rather than buying options will result in market makers dynamically hedging their long option exposure in a stabilizing manner, consistent with the first objective. Selling a 'strangle' allows a central bank to increase the credibility of its commitment to a target zone, and could have a lower expected cost than spot market interventions. However, this strategy also exposes the central bank to an unlimited loss potential.
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Descripció física:1 online resource (40 pages)
Format:Mode of access: Internet
ISSN:1018-5941
Accés:Electronic access restricted to authorized BRAC University faculty, staff and students