CONFIDENTIAL
8
LAF bid and offer rates
14.
The bid and offer rates would normally be set around short term interest rates for the US dollar, to which the Hong Kong dollar is firmly linked. Once set, they would only be altered when there were a need
to support the exchange rate. For example, a change may be made in response to a change in the US interest
rates themselves, 50 ás to prevent the exchange rate from deviating from 7.80 under the influence of a
significant interest rate differential between the two currencies. Alternatively a change may be made to bring about a significant interest rate differential between
the two currencies So as
contain an unacceptable deviation, for whatever reasons, in the exchange rate
from 7.80.
to
15.
Whilst short term US dollar interest rates
would be used as reference for setting the LAF bid and offer rates, there is a variety of such rates and it would not be practicable to specify one. Given that LAF is an overnight facility, there is argument for
using the overnight US dollar rate as the reference
rate. But this can be quite volatile and may therefore lead to the LAF bid and offer rates being changed more
often than necessary or desirable. One alternative
rates.
may be to use the FED funds rate plus the average margin by which this rate has been below the US dollar overnight rate as the reference for setting LAF
LAF bid and offer
Yet another alternative may be to use the US discount rate plus the average margin by which this rate has been below the US dollar overnight rate. It would be prudent at the early stage of operation of
LAF to keep options open and reconsider
reconsider the choice of the reference rate in the light of actual experience.
CONFIDENTIAL
P.ll