Implementation of currency interventions of the Central Bank of Armenia with financial derivatives

Abstract

Purpose: The main goal of the paper is to develop financial derivatives of the Republic of Armenia (RA) as hedging tools for foreign exchange risk management for financial organizations and other entities. The secondary goal is to substantiate the efficiency and expediency of the use of financial derivatives as alternative tools for the implementation of foreign exchange interventions of the Central Bank of Armenia (CBA). Methodology: In order to evaluate the currency interventions carried out by the Central Bank of Armenia (CBA), the interventions and their impact were studied by applying causal-comparative analysis and synthesis methods based on the CBA and International Monetary Fund (IMF) data. The most efficient intervention tools were revealed as a result of such analysis. The forward prices were calculated based on the swap intervention data and using the principle of impossibility of arbitration. Results: The present study substantiated that the application of a forward contract for difference can ensure the same goals like those pursued by foreign exchange interventions with no impact on foreign reserves and no need for sterilization. Conclusion: It was proposed to divide the swap agreements used by the CBA into spot and forward, which will ensure the realization of the same goals along with engaging a large number of non-financial companies. At the same time, the application of a forward contract for difference during the implementation of foreign exchange interventions will lead to the development of the financial derivatives market and ensure the matching of foreign exchange cash flows received by businesses in different periods.