Cover IMF Working Papers
Buy Book in Print
Central Bank Participation in Currency Options Markets
Author:
Mr. Peter Breuer
Search for other papers by Mr. Peter Breuer in
Current site
Google Scholar Close
Series:
IMF Working Papers
Volume/Issue:
Volume 1999: Issue 140
Language:
English
Publication Date:
01 Oct 1999
DOI:
https://doi.org/10.5089/9781451856101.001
ISBN:
9781451856101
ISSN:
1018-5941
Pages:
40
Keywords:
WP; option market; spot market intervention; option exposure; option price; option position; options transaction; central bank intervention; currency options; dynamic hedging; Options; Hedging; Exchange rates; Currencies; Asset prices; Global
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
Download PDF (1.8 MB) Download Epub
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.
  • Collapse
  • Expand
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund