Options and Central Banks Currency Market Intervention: The Case of Colombia

36 Pages Posted: 11 Sep 2014

See all articles by Helena Keefe

Helena Keefe

Fordham University - Department of Economics

Erick W. Rengifo

Fordham University - Department of Economics - Center for International Policy Studies (CIPS)

Date Written: September 2014

Abstract

Several central banks in emerging economies are concerned with excessive volatility in foreign exchange markets and would like to control the direction and speed with which the value of their currency changes. Historically, currency market interventions have consisted of using foreign exchange reserves to purchase and sell foreign currency directly in the spot market. However, these spot interventions are not the only type of interventions available to central banks. The Colombian central bank implemented various strategies to intervene into currency markets to smooth volatility, build reserves, and influence the direction of the exchange rate by issuing options contracts as well as using daily discretionary purchases of US dollars. In this paper we analyze these recent strategies employed by Colombia, with a special focus on the volatility option strategy. We argue that the abandonment of the options program was premature and that its success was not fully appreciated in previous literature.

Keywords: Exchange Rates, Intervention, Foreign Exchange Markets, Currency Options, International Reserves, International Finance

JEL Classification: F31, G15

Suggested Citation

Keefe, Helena and Rengifo, Erick W., Options and Central Banks Currency Market Intervention: The Case of Colombia (September 2014). Available at SSRN: https://ssrn.com/abstract=2494821 or http://dx.doi.org/10.2139/ssrn.2494821

Helena Keefe (Contact Author)

Fordham University - Department of Economics ( email )

Bronx, NY 10458
United States

Erick W. Rengifo

Fordham University - Department of Economics - Center for International Policy Studies (CIPS) ( email )

United States
0017188174061 (Phone)
0017188173518 (Fax)

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