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Currency Option Trading Strategies as an Alternative Tool for Central Bank Foreign Exchange Interventions

Author

Listed:
  • Helena Glebocki Keefe

    (Fairfield University)

  • Erick W. Rengifo

    (Fordham University)

Abstract

Many emerging markets' central banks are concerned with excessive volatility in foreign exchange rates and intervene to smooth volatility. This paper proposes a specific option trading strategy as an alternative central bank tool to aid foreign currency intervention, where dynamic delta hedging of the net portfolio position guides the central bank's intervention in the spot market.We term this trading strategy the "W" spread, and show that the exchange rate can be stabilized and volatility lowered with this market-driven approach to foreign exchange intervention.

Suggested Citation

  • Helena Glebocki Keefe & Erick W. Rengifo, 2019. "Currency Option Trading Strategies as an Alternative Tool for Central Bank Foreign Exchange Interventions," International Journal of Central Banking, International Journal of Central Banking, vol. 15(2), pages 179-234, June.
    • Handle: RePEc:ijc:ijcjou:y:2019:q:2:a:6
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    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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