Foreign Currency Tenders in Hungary : A Tailor-Made Instrument for a Unique Challenge

In September 2011 new legislation allowed Hungarian households, under certain conditions, to repay their foreign-currency-denominated mortgages at preferential, predetermined exchange rates. This created an open foreign currency position of significant but uncertain size on the balance sheet of the Hungarian banking system. To close the open position, banks needed to convert Hungarian forints to euros and Swiss francs in large quantities over a short time period. To avoid excessive instability of the exchange rate, the central bank introduced a temporary facility – weekly foreign currency tenders – which in essence was a transparent, targeted, special foreign exchange intervention of significant size. It was designed to prevent speculative front-running on the foreign exchange market, and to provide banks with a hedge against a special type of uncertainty stemming from the unknown quantity of the mortgages to be repaid. The programme supported not only the inflation goal of the MNB, but also the stability of the financial system.Full publication: "http://ssrn.com/abstract=2420030" Market Volatility and Foreign Exchange Intervention in EMEs: What Has Changed?