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Pricing IMF liquidity provision: The value of the IMF liquidity commitment

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  • Rossi, Marco
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    Abstract

    This paper presents a market-based framework for pricing the International Monetary Fund's commitment to provide liquidity assistance, accounting for the credit risk and the insurance benefit involved in such operations. It is based on the isomorphic correspondence between Fund liquidity and common stock put options. The illustrative numerical examples show that the value of this liquidity guarantee could range between several and three hundreds basis points depending on the borrower's creditworthiness, the volatility of capital flows to the borrowing country, and the amount of funds potentially needed to meet the borrower's external obligations.

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    Bibliographic Info

    Article provided by Elsevier in its journal Emerging Markets Review.

    Volume (Year): 9 (2008)
    Issue (Month): 1 (March)
    Pages: 70-77

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    Handle: RePEc:eee:ememar:v:9:y:2008:i:1:p:70-77

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    Web page: http://www.elsevier.com/locate/inca/620356

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    1. Ferhan Salman & Aslihan Salih, 1999. "Modeling the Volatility In the Central Bank Reserves In An Emerging Market Setting," Working Papers 9901, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    2. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
    3. Robert P. Flood & Nancy P. Marion, 2002. "Holding International Reserves in an Era of High Capital Mobility," IMF Working Papers 02/62, International Monetary Fund.
    4. Frenkel, Jacob A & Jovanovic, Boyan, 1981. "Optimal International Reserves: A Stochastic Framework," Economic Journal, Royal Economic Society, vol. 91(362), pages 507-14, June.
    5. Ramachandran, M., 2004. "The optimal level of international reserves: evidence for India," Economics Letters, Elsevier, vol. 83(3), pages 365-370, June.
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