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JTDerp


Total Posts: 55
Joined: Nov 2013
 
Posted: 2019-05-05 10:55
Any good references on the math behind currency pegging by central banks as a function of:
- the bank's balance sheet
- market prices of the 'master' currency...specifically, how the bank traders (try to) ensure the currency to be pegged stays within the float range spec'd? Do they just watch intraday market action and come in with counter-acting orders where needed? Or some more structural way?

This harkens back to Soros & BoE, but I'm taking interest moreso from recent comments by Kyle Bass about Hong Kong's balance sheets vs USD.

"How dreadful...to be caught up in a game and have no idea of the rules." - C.S.

Strange


Total Posts: 1557
Joined: Jun 2004
 
Posted: 2019-05-05 19:52
maybe this:
https://files.stlouisfed.org/files/htdocs/publications/review/01/09/0109md.pdf

In a less rigorous way, something or other can be based on the square root volume/impact model:

dP = alpha * volatility * sqrt(quantity/volume)

i.e. if you have a band that's dP percent away for a currency with a given volatility and volume, you'd need to spend

volume * (dP /(alpha * volatility))^2

to prevent that boundary from being breached. Of course, value of alpha is calibrated from the experience of the CB traders and there is also a question of estimating volume and volatility in a crisis.

Eher Ende mit Schrecken als Schrecken ohne Ende

nikol


Total Posts: 729
Joined: Jun 2005
 
Posted: 2019-05-05 22:16
Pegging is not only about trading but can involve a range of intervention tools.

https://www.bis.org/publ/bppdf/bispap24d.pdf

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2474011

rickyvic


Total Posts: 187
Joined: Jul 2013
 
Posted: 2019-05-06 01:15
I have never done any calculations but my educated guess is that this limits might work for a small country and so illiquid currencies which you can trade through NDF against certain banks.
As already mentioned for large countries this is not going to matter compared to policy making.

It is an interesting topic though and that soros vs boe story always fascinated me.

"amicus Plato sed magis amica Veritas"
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