Colombia Cenbank to Employ Options to Curb Peso Volatility

Colombia’s central bank will auction call options to limit foreign exchange volatility, which it says can contribute to inflationary pressure.

The bank will auction $500 million worth of call options when the exchange rate is 7 percent weaker or more than its 20-day moving average, central bank Governor Jose Dario Uribe told reporters in Bogota, after the bank’s October policy meeting.

The measure, “aims to moderate unjustified drops in the currency which can contribute to unanchoring inflation expectations, and give liquidity to the foreign exchange market,” Uribe said, reading the bank’s policy statement.

The options will mature one month from the day of the auction, Uribe said. The central bank later put out a statement saying it may also auction put options monthly to accumulate international reserves when the peso is stronger than its 20-day moving average, without giving a percentage. In the case of put options, the bank said the amount would be announced at the time.

The measures can reduce short term volatility but won’t change the peso’s fundamental trend, said Juan David Ballen, a strategist at Casa de Bolsa, the brokerage firm of Colombia’s biggest banking group.

“It wasn’t expected,” Ballen said in a telephone interview. “Along with the rate increase, the currency intervention is designed to contain inflation expectations.”

Inflation accelerated to 5.35 percent last month, its fastest pace in more than six years, as poor farming weather caused a spike in food prices and peso depreciation continues to push import prices higher.

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