This post is not directed to you specifically, rather, it is offered for the general interest of those who follow options.
Once in a while a big player steps into the options market and people take notice. Here is one very big player who may decide to take a position with options.
Reprinted here because the link will soon expire.
From: South China Morning Post
fire over costly peg
Nobel Laureate economist Professor
Merton Miller delivered an intellectual
broadside on the Government's defence
of the currency peg yesterday and
proposed a radical plan that would
involve the Government selling currency
options as an insurance policy to restore
confidence and reduce interest rates.
Defending the Hong Kong dollar through
high interest rates was doomed to failure,
as it only enriched speculators and
created a climate of fear where ordinary
people switched savings into foreign
currency, Mr Miller said.
Talk was cheap, and the Government
should "put its money where its mouth
is", signalling a willingness to bear a great
cost if the peg was removed, he said.
The Hong Kong Monetary Authority
should issue Hong Kong dollar put
options in the same way exchange bills
were sold. Investors had protection if the
currency devalued, while the
Government would face a big payout.
Mr Miller proposed a rolling issuance
programme, starting with the sale of
options with face value of US$8 billion
to $10 billion.
After addressing an audience of 600
bankers and businessmen at the Asia
Society, Mr Miller pitched the insurance
scheme to Chief Executive Tung
Chee-hwa, whom he described as
Sticking with the high interest rate policy
would ultimately trigger flight capital
from Hong Kong, Mr Miller said. Even if
the peg held under such conditions, the
economic cost would be high.
"Keeping up this pressure from such high
interest rates and there may not be a
Hong Kong . . . you are looking at
depression," he said.
The proposal, devised by Hong Kong
University of Science and Technology
academics Professor Chen Nai-fu and Dr
Alex Chan, was sent to the authority and
Financial Secretary Sir Donald Tsang
Yam-kuen on November 14. Mr Tung
was apparently not aware of its
Mr Miller had arrived from Beijing where
he met Vice-Premier Zhu Rongji, who is
said to be giving the proposal serious
consideration as a way to signal the
mainland's commitment not to devalue
Despite some respite from high interest
rates, Hong Kong was at a critical
juncture as the self-adjusting arbitrage
between US dollar and local rates broke
down, he said.
Squeezing speculators who short sold the
currency by tightening the money supply,
raising interest rates, only profited
speculators holding currency forward
Since these derivatives were a dominant
part of their arsenal, the authority should
in effect fight fire with fire, he said.
An authority spokesman for the authority
said it was studying the proposal.
Banks and companies with Hong Kong
dollar exposure would buy the option
By signalling the Government's
determination to hold the peg, funds
would flow back into Hong Kong dollars
and the interest rate risk premium would
shrink to a small margin above US levels,
Mr Miller said. There was no need to
back all Hong Kong dollars in circulation
or commit the exchange fund's full
reserves to the contract.
The plan was ill-advised in Asian
countries racked by economic turmoil,
but Hong Kong's stable banking system,
healthy trade account and political
stability gave it credibility in the market
place, he said.
If the peg held and the put options were
not exercised, the Government would
make money by keeping investors'
If it broke, the exchange fund would face
a payout equal to the percentage fall in
Market reports suggest mainland
companies based in Hong Kong have
sold billions of dollars worth of Hong
Kong dollar put options. It is not clear
whether they were instructed by Beijing.