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Central Bank Participation in Currency Options Markets


  • Peter Breuer


This paper analyzes whether and how central banks can use currency options to lower exchange rate volatility and maintain (implicit) target zones in foreign exchange markets. It argues that selling rather than buying options will result in market makers dynamically hedging their long option exposure in a stabilizing manner, consistent with the first objective. Selling a “strangle” allows a central bank to increase the credibility of its commitment to a target zone, and could have a lower expected cost than spot market interventions. However, this strategy also exposes the central bank to an unlimited loss potential.

Suggested Citation

  • Peter Breuer, 1999. "Central Bank Participation in Currency Options Markets," IMF Working Papers 99/140, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:99/140

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    References listed on IDEAS

    1. Peter Stella, 1997. "Do Central Banks Need Capital?," IMF Working Papers 97/83, International Monetary Fund.
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    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Zapatero, Fernando & Reverter, Luis F., 2003. "Exchange rate intervention with options," Journal of International Money and Finance, Elsevier, vol. 22(2), pages 289-306, April.
    2. repec:wly:jmoncb:v:49:y:2017:i:2-3:p:567-578 is not listed on IDEAS
    3. Keefe, Helena Glebocki & Rengifo, Erick W., 2015. "Options and central bank currency market intervention: The case of Colombia," Emerging Markets Review, Elsevier, vol. 23(C), pages 1-25.
    4. Markus Hertrich & Heinz Zimmermann, 2017. "On the Credibility of the Euro/Swiss Franc Floor: A Financial Market Perspective," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(2-3), pages 567-578, March.
    5. Suh, Sangwon & Zapatero, Fernando, 2008. "A class of quadratic options for exchange rate stabilization," Journal of Economic Dynamics and Control, Elsevier, vol. 32(11), pages 3478-3501, November.
    6. 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.


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