FX Interventions and Capital‐Constrained Banks: Evidence from USD/ILS Spot, Forward, and Option Markets

Using confidential daily data, we examine the Bank of Israel's foreign exchange interventions from 2013 to 2019. We find that a 1 billion U.S. dollars (USD) purchase leads to a 0.82% depreciation of the Israeli Shekel (ILS)–a strong effect compared to other studies. We show that this effectiveness can partially be attributed to the limited risk‐taking capacity of global banks. The interventions also widen the negative deviation from covered interest parity and influence the higher‐order moments of risk‐neutral expectations derived from options prices. We find that USD purchases shift the USD/ILS distribution upward and reduce crash risk. Moreover, the options market anticipates and prices in upcoming interventions.