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

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Listed:
  • Helena Glebocki Keefe

    (Fordham University)

  • Erick W. Rengifo

    (Fordham University)

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.

Suggested Citation

  • Helena Glebocki Keefe & Erick W. Rengifo, 2014. "Options and Central Banks Currency Market Intervention: The Case of Colombia," Fordham Economics Discussion Paper Series dp2014-06, Fordham University, Department of Economics.
  • Handle: RePEc:frd:wpaper:dp2014-06
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    References listed on IDEAS

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    4. David Archer, 2005. "Foreign exchange market intervention: methods and tactics," BIS Papers chapters, in: Bank for International Settlements (ed.), Foreign exchange market intervention in emerging markets: motives, techniques and implications, volume 24, pages 40-55, Bank for International Settlements.
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    More about this item

    Keywords

    Exchange Rates; Intervention; Foreign Exchange Markets; Currency Options; International. Reserves; International Finance.;
    All these keywords.

    JEL classification:

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

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