The Relative Effectiveness of Spot and Derivatives Based Intervention

52 Pages Posted: 24 Aug 2018

See all articles by Milan Nedeljkovic

Milan Nedeljkovic

FEFA - Faculty of Economics, Finance and Administration; CESifo (Center for Economic Studies and Ifo Institute)

Christian Saborowski

International Monetary Fund (IMF)

Date Written: June 28, 2018

Abstract

This paper studies the relative effectiveness of foreign exchange intervention in spot and derivatives markets. We make use of Brazilian data where spot and non-deliverable futures based intervention have been used in tandem for more than a decade. The analysis finds evidence in favor of a significant link between both modes of intervention and the Real/Dollar exchange rate return. In line with theory, the impact of spot market intervention is strikingly similar to that achieved through futures based intervention worth an equivalent amount in notional principal when convertibility risk is limited. We show that both types of interventions also affect the level and the price of hedging risk in the foreign exchange market.

Keywords: FX intervention, derivatives, exchange rates

JEL Classification: F310, G100, E500

Suggested Citation

Nedeljkovic, Milan and Saborowski, Christian, The Relative Effectiveness of Spot and Derivatives Based Intervention (June 28, 2018). CESifo Working Paper Series No. 7127. Available at SSRN: https://ssrn.com/abstract=3235236

Milan Nedeljkovic (Contact Author)

FEFA - Faculty of Economics, Finance and Administration ( email )

Bulevar Zorana Djindjica 44
Belgrade, +381
Serbia

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Christian Saborowski

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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