Currency Board, Asian Financial Crisis, and the Case for Put Options

Francis T. LUI*, Leonard K. CHENG, Yum K. KWAN

*Corresponding author for this work

Research output: Book Chapters | Papers in Conference ProceedingsBook ChapterResearchpeer-review


The chapter reviews the circumstances under which speculative attacks on the currency board of Hong Kong occurred during the Asian financial turmoil. It is shown that the conventional defense mechanism via interest arbitrage has not functioned properly. An alternative approach of issuing put options to strengthen the currency board is evaluated. We show that the “technical” measures eventually undertaken by the Hong Kong Monetary Authority (HKMA) in September 1998 are functionally equivalent to issuing the put options, thereby providing a natural experiment of this idea. Based on credibility measures extracted from financial market data since the inception of the board in 1983, we find that interest rate arbitrage had been working properly until the rule-bound currency board was eroded by central bank-like, discretionary policies pursued by the HKMA. However, after implementing the put options proposal, which effectively put the HKMA back onto the rule-bound track, interest rate arbitrage appeared to be effective again.
Original languageEnglish
Title of host publicationExchange Rate Regimes and Macroeconomic Stability
EditorsLok-Sang HO, Chi-Wa YUEN
Place of PublicationUnited States
PublisherSpringer US
Number of pages30
ISBN (Electronic)9781461510413
ISBN (Print)97814613-53652
Publication statusPublished - 2003
Externally publishedYes

Bibliographical note

An earlier version of this paper was presented at the American Economic Association/Chinese Economists Society meetings in New York City on January 4, 1999. We are indebted to K.C. Chan, Yuk-Shee Chan, Zhaohui Chen, and Merton Miller for useful discussions and comments. Alex Chan and Nai-fu Chen deserve special credits for originating some of the ideas in this paper. In a sense they are collaborators of the paper. All remaining errors are ours. Financial support from the Research Grant Council of Hong Kong (grant number HKUST6217/97H) and the City University of Hong Kong (grant number 7001140) is gratefully acknowledged.


  • Exchange Rate
  • Interest Rate
  • Exchange Rate Regime
  • High Interest Rate
  • Monetary Authority


Dive into the research topics of 'Currency Board, Asian Financial Crisis, and the Case for Put Options'. Together they form a unique fingerprint.

Cite this