This paper investigates the potential for foreign speculators to profit from simultaneously taking
short positions in foreign exchange and equity markets under a fixed exchange rate regime, in
what has been termed as the “double play.” Such a strategy is considered when the monetary
authority is faced with two conflicting objectives—exchange rate stability and low interest rates.
While the monetary authority may not be able to directly intervene to stabilize interest rates
under the fixed exchange rate regime, it may consider intervention in equity markets to head off
speculative pressure on interest rates. The model determines market conditions where
speculators may find the double play strategy profitable and the impact of government
intervention on speculative short equity positions and the interest rate, concluding that
intervention can never simultaneously reduce speculation in the equity and the money markets.
In the case where country fundamentals are strong, intervention while reducing short positions in
equity markets actually increases short positions in the money market and induces higher interest
rates. The paper concludes by discussing the Hong Kong Monetary Authority’s intervention in
the Hong Kong equity market within the context of this model.