Spot and foward market intervention during the 1997 Korean currency crisis

This study shows that, among the two crisis periods of 1997, January-March and September-November, the spot market interventions were effective in stabilizing the Korean currency in the first period, whereas there is no evidence that the forward market interventions were effective in either of these two periods. If anything, the forward market interventions resulted in a destabilization of the exchange rate. This result may be due to excessive use of forward market interven-tions from 20th October, when the forward premium tended to show amplifying movement. Although it was clear that the Korean won was no longer defendable by forward market interventions, the Korean monetary authorities intervened in vain to defend the Korean currency. The forward market intervention seemed to be heavily used because the BOK believed its efficacy of a bear squeeze and wanted to camouflage the drain in foreign reserves. However, wasting foreign reserves in this operation proved too costIy for the BOK and the Korean economy. The result of this study suggests that, only when forward premiums are maintained within some margin, forward market interventions may be an effective instrument for stabilizing the foreign exchange market, otherwise it can create unwanted results, precipitating only the collapse of the exchange rate and aggravating the drain of foreign reserves, especially in a crisis period.