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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Bibliographic Details
Main Author: Breuer, Peter
Format: Journal
Language:English
Published: Washington, D.C. : International Monetary Fund, 1999.
Series:IMF Working Papers; Working Paper ; No. 1999/140
Online Access:Full text available on IMF
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245 1 0 |a Central Bank Participation in Currency Options Markets /  |c Peter Breuer. 
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300 |a 1 online resource (40 pages) 
490 1 |a IMF Working Papers 
500 |a <strong>Off-Campus Access:</strong> No User ID or Password Required 
500 |a <strong>On-Campus Access:</strong> No User ID or Password Required 
506 |a Electronic access restricted to authorized BRAC University faculty, staff and students 
520 3 |a 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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830 0 |a IMF Working Papers; Working Paper ;  |v No. 1999/140 
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