The Relative Effectiveness of Spot and Derivatives Based Intervention: The Case of Brazil

Abstract

This paper studies the relative effectiveness of foreign exchange intervention in spot and derivatives markets. We make use of Brazilian data where spot and non-deliverable futures based intervention have been used in tandem for more than a decade. The analysis finds evidence in favor of a significant link between both modes of intervention and the first two moments of the real/dollar exchange rate. As predicted by theory for the case of negligible convertibility risk, the impact of spot market intervention in our baseline sample is strikingly similar to that achieved through futures based intervention worth an equivalent amount in notional principal.

Shocks and Capital Flows

“…Some central banks have made increasing use of foreign currency derivatives (that is, forwards, options, and swap contracts) in recent years. In most respects, these operations are equivalent to operations in spot markets, as discussed by Nedeljkovic and Saborowski (2017). To encompass these operations, the FXI proxy includes changes in aggregate short and long positions in forwards and futures in foreign currencies vis-à-vis the domestic currency (including the forward leg of currency swaps) and financial instruments denominated in foreign currency but settled by other means (for example, in domestic currency), as reported in IMF's International Reserves and Foreign Currency Liquidity Template.…”

Efficacy of central bank intervention in the foreign exchange market of the BRICS countries

“…In the case of Brazil, Nedeljkovic and Saborowski (2017) examined the effectiveness of intervention in spot and forward markets. The authors used daily data for the period from 2008 to 2013 on the real-dollar exchange rate, purchase and sell off dollar by monetary authority (Banco Central do Brazil), the volatility index (VIX), daily returns on 5-year credit default swaps and interest rate differential.…”

Patterns of Foreign Exchange Intervention under Inflation Targeting

“…Some central banks have made increasing use of foreign currency derivatives (i.e., forwards, options and swap contracts) in recent years. In most respects, these operations are equivalent to operations in spot markets, as discussed by Nedeljkovic and Saborowski (2017). To encompass these operations, the FXI proxy includes changes in aggregate short and long positions in forwards and futures in foreign currencies vis-à-vis the domestic currency (including the forward leg of currency swaps) and financial instruments denominated in foreign currency but settled by other means (e.g., in domestic currency), as reported in the IMF's International Reserves and Foreign Currency Liquidity Template.…”