Question Details

Impact of Intervention on Currency Option Premiums 



1. Pegged Currencies. Why do you think a country suddenly decides to peg its currency to the dollar or some other currency? When a currency is unable to maintain the peg, what do you think are the typical forces that break the peg?


2. Impact of Intervention on Currency Option Premiums . Assume that the central bank of the country Zakow periodically intervenes in the foreign exchange market to prevent large upward or downward fluctuations in its currency (called the zak) against the U.S. dollar. Today, the central bank announced that it will no longer intervene in the foreign exchange market. The spot rate of the zak against the dollar was not affected by this news. Will the news affect the premium on currency call options that are traded on the zak? Will the news affect the premium on currency put options that are traded on the zak? Explain.




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