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

Helena Glebocki Keefe and Erick Rengifo
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Helena Glebocki Keefe: Fordham University
Erick Rengifo: Fordham University

Fordham Economics Discussion Paper Series from Fordham University, Department of Economics

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. (search for similar items in EconPapers)
JEL-codes: F31 G15 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-cba and nep-mon
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