Impact of Intervention on Currency Option Premiums
Response to the following problem:
Assume that the central bank of the country Zakow periodically intervenes in the foreign exchange market to prevent large upward or downward fluctuations in its currency (the zak) against the U.S. dollar. Today, the central bank announced that it would no longer intervene in the foreign exchange market. The spot rate of the zak against the dollar was not affected by this news.
Will the news affect the premium on currency call options that are traded on the zak? Will the news affect the premium on currency put options that are traded on the zak? Explain.