FX Interventions in a Small Open Economy: The Case of Domestic Non-Deliverable Forwards

46 Pages Posted: 24 Oct 2024 Last revised: 4 Feb 2025

See all articles by Yeonggyu Yun

Yeonggyu Yun

University of Wisconsin-Madison - Department of Economics

Stefano Lord-Medrano

University of Wisconsin - Madison, Department of Economics, Students

Date Written: October 18, 2024

Abstract

We study the effects of domestic non-deliverable forwards (DNDF) on the level and volatility of the USD/MXN nominal exchange rate. We focus on the introduction of the DNDF policy by the Bank of Mexico in 2017 and find that the first announcement of the policy was successful in mitigating both depreciation pressure and volatility of the USD/MXN exchange rate. Our estimates show an appreciation of the Mexican Peso by 32.91 cents after the announcement of the policy and a reduction in the option-implied exchange rate volatility of different maturities by 40 cents on average. We rationalize our findings using a model of a small open economy with collateral constraints and show that the DNDF policy can be used to mitigate severity of a self-fulfilling currency crisis, thereby counteracting the downward pressure on the domestic currency.

Keywords: FX intervention, Non-deliverable forwards, Self-fulfilling crisis

JEL Classification: E44, E58, F31, F41, G14, H23

Suggested Citation

Yun, Yeonggyu and Lord-Medrano, Stefano, FX Interventions in a Small Open Economy: The Case of Domestic Non-Deliverable Forwards (October 18, 2024). Available at SSRN: https://ssrn.com/abstract=4992672 or http://dx.doi.org/10.2139/ssrn.4992672

Yeonggyu Yun (Contact Author)

University of Wisconsin-Madison - Department of Economics ( email )

1180 Observatory Drive
Madison, WI 53706
United States

Stefano Lord-Medrano

University of Wisconsin - Madison, Department of Economics, Students ( email )

Madison, WI
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
66
Abstract Views
258
Rank
700,406
PlumX Metrics