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Pricing Fund Liquidity Provision

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  • Marco Rossi
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    Abstract

    This paper presents a market-based framework for pricing Fund liquidity assistance that accounts 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. Although only illustrative, the simulations presented in this paper show that the value of the liquidity guarantee provided by the Fund could range from a few to over one hundred 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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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=20476
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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/45.

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    Length: 11
    Date of creation: 01 Feb 2007
    Date of revision:
    Handle: RePEc:imf:imfwpa:07/45

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    Related research

    Keywords: Fund liquidity; Economic models; pricing; capital markets; credit; international capital markets; access to international capital; access to international capital markets; access to capital markets; international capital; option pricing; prices; volatility of capital flows; put options; capital flows; moral hazard; crisis prevention; payment systems; conditionality; options research; payments; capital flow volatility; debt service; purchases; capital account crises;

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    1. Barone-Adesi, Giovanni & Whaley, Robert E, 1987. " Efficient Analytic Approximation of American Option Values," Journal of Finance, American Finance Association, vol. 42(2), pages 301-20, June.
    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.
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