Central Bank Foreign Exchange Market Intervention and Option Contract Specification: The Case of Colombia

Ousmene Mandeng

No 2003/135, IMF Working Papers from International Monetary Fund

Abstract: This paper aims to identify appropriate option contract specifications for effective central bank exchange market intervention. Option contract specifications determine the impact of options on the underlying asset or currency, and hence their actual effect on asset price or currency volatility and are therefore key to determining the effectiveness of option-based intervention. The paper reviews the experience of the systematic option-based foreign exchange market intervention of the Central Bank of Colombia and finds that its contract has only been moderately successful at abating exchange rate volatility, which is attributed here to sub-optimal contract specifications.

Keywords: WP; option contract; strike price; option contract specification; put; Options; Colombia; option auction; option position; volatility option; volatility call option option contract; intervention rule; option bearer; plain vanilla option; option volume; option user; Foreign exchange intervention; Hedging; Exchange rates; Currency markets (search for similar items in EconPapers)
Pages: 17
Date: 2003-06-01
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Citations: View citations in EconPapers (31)

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