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

Author/Editor:

Ousmene J Mandeng

Publication Date:

June 1, 2003

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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.

Series:

Working Paper No. 2003/135

Subject:

English

Publication Date:

June 1, 2003

ISBN/ISSN:

9781451855722/1018-5941

Stock No:

WPIEA1352003

Pages:

17

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