The Relative Effectiveness of Spot and Derivatives Based Intervention: The Case of Brazil
IMF Working Papers, January 24, 2017
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Bibliographic details
- Authors: Milan Nedeljkovic, Christian Saborowski
- Published: January 24, 2017
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475571035.001
Overview
- Title: The Relative Effectiveness of Spot and Derivatives Based Intervention: The Case of Brazil
- Authors: Milan Nedeljkovic, Christian Saborowski
- Date: January 24, 2017
- Publication type: IMF Working Papers (Working Paper No. 2017/011, Issue 011)
- Pages: 35
- Volume: 2017
- DOI: https://doi.org/10.5089/9781475571035.001
- Stock No: WPIEA2017011
- ISBN: 9781475571035
- ISSN: 1018-5941
Research question and context
- Research question: The relative effectiveness of foreign exchange intervention in spot and derivatives markets.
- Context: Uses Brazilian data where spot and non-deliverable futures based intervention have been used in tandem for more than a decade.
- Subjects and keywords: Currency swaps, Exchange rate adjustments, Exchange rates, Financial institutions, Foreign exchange, Futures; Keywords include Currency swaps, Derivatives, dollar, dollar position, Exchange rate adjustments, Exchange rates, forward market, Futures, futures contract, futures intervention, futures intervention need, FX futures, FX Intervention, Global, intervention, intervention variable, long-dollar futures intervention, spot intervention, WP.
Key findings
- Evidence supports a significant link between both spot and derivatives modes of intervention and the first two moments of the real/dollar exchange rate.
- For the case of negligible convertibility risk, theoretical prediction confirmed: the impact of spot market intervention in the baseline sample is strikingly similar to that achieved through futures based intervention worth an equivalent amount in notional principal.
Methodological notes
- Empirical setting: Brazil, with concurrent use of spot and non-deliverable futures interventions over more than a decade.
- Comparative focus: Spot market intervention versus futures-based intervention measured in notional principal.
Implications and conclusions
- Both spot and derivatives-based (futures) interventions can materially affect the level and volatility (first two moments) of the real/dollar exchange rate.
- When convertibility risk is negligible, futures intervention sized to match spot intervention in notional principal can achieve similar effects on exchange rate outcomes.
IMF Working Paper — The Relative Effectiveness of Spot and Derivatives Based Intervention: The Case of Brazil (Nedeljkovic and Saborowski, January 24, 2017).