A Joint Foreign Currency Risk Management Approach for Sovereign Assets and Liabilities
An asset and liability management framework for managing risks arising from sovereign foreign exchange obligations requires a joint analysis of (i) the external financial liabilities resulting from a country's sovereign debt and (ii) the forei...
| Main Authors: | , , , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2019
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/351021549390632151/A-Joint-Foreign-Currency-Risk-Management-Approach-for-Sovereign-Assets-and-Liabilities http://hdl.handle.net/10986/31232 |
| Summary: | An asset and liability management
framework for managing risks arising from sovereign foreign
exchange obligations requires a joint analysis of (i) the
external financial liabilities resulting from a
country's sovereign debt and (ii) the foreign exchange
assets of its central bank. Governments often issue sizable
amounts of debt denominated in foreign currencies,
subjecting their fiscal positions to foreign exchange
volatilities. Prudent management of a sovereign’s foreign
exchange position under an asset and liability management
framework enables governments to mitigate risks at the
lowest possible cost, hence increasing resilience to
external shocks. Based on the challenges associated with the
implementation of an asset and liability management
framework, this study recommends a practical approach that
includes analysis of the foreign exchange positions of
central bank reserves and central government debt portfolios
and optimization of the net position. The proposed model is
tested, using the foreign exchange reserve and external debt
data of seven countries (Albania, Ghana, FYR Macedonia,
South Africa, the Republic of Korea, Tunisia, and Uruguay).
The paper employs quantitative methods to explore the impact
of an overarching asset and liability management strategy
and integrated approach on the efficient management of
foreign exchange risk. It provides policy recommendations on
ways to minimize the risk of foreign exchange mismatches and
increase the return on foreign exchange reserves. |
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