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Strategies & Market Trends : Options for Newbies -(Help Me Obi-Wan-Kenobe) -- Ignore unavailable to you. Want to Upgrade?

To: ---------- who wrote (571)	1/19/1998 9:50:00 PM
From: Mark Nelson	Read Replies (1) \| Respond to of 2241

Hi Doug, 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 Government under fire over costly peg defence SIMON PRITCHARD 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 "receptive". 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 existence. 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 the yuan. 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 contracts. 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 contracts. 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' premium payments. If it broke, the exchange fund would face a payout equal to the percentage fall in the currency. 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.