A Model of the EFA Liabilities
AbstractThe authors describe the liabilities model of the Exchange Fund Account (EFA). The EFA is managed using an asset-liability matching framework that requires currency and duration matching of both sides of the balance sheet. The model chooses the mix of liabilities across instruments and tenors that maximizes the return of the fund subject to a fixed asset-allocation rule and duration matching. The model considers two types of instruments: cross-currency swaps and global bonds. The main trade-off in the model is the cost advantage of cross-currency swaps relative to global bond issuance. Cross-currency swaps are, on average, a cheaper source of funding, but carry counterparty risk. The model penalizes a skewed maturity profile of liabilities because it carries rollover risks. The model also reports the implied asset-liability gap, which is a function of the total amount of cross-currency swaps.
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Bibliographic InfoPaper provided by Bank of Canada in its series Discussion Papers with number 11-11.
Length: 34 pages
Date of creation: 2011
Date of revision:
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Debt Management; Foreign reserves management;
Find related papers by JEL classification:
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-01-03 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- David Jamieson Bolder, 2006. "Modelling Term-Structure Dynamics for Risk Management: A Practitioner's Perspective," Working Papers 06-48, Bank of Canada.
- John Y. Campbell, 2006.
NBER Working Papers
12149, National Bureau of Economic Research, Inc.
- Detemple, Jérôme & Rindisbacher, Marcel, 2008. "Dynamic asset liability management with tolerance for limited shortfalls," Insurance: Mathematics and Economics, Elsevier, vol. 43(3), pages 281-294, December.
- Missale, Alessandro, 1999. "Public Debt Management," OUP Catalogue, Oxford University Press, number 9780198290858, September.
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