The optimal currency composition of external debt
AbstractThe increased volatility of exchange rates, interest rates and goods prices has focused fresh attention on the importance for developing countries of reducing their risks in these markets. Although, these countries generally cannotuse such conventional hedging instruments as currency and commodity futures, they can use the currency composition of their external debt to hedge against exchange rates and commodity prices. In this line, this paper uses findings from the literature on optimal portfolio theory to discuss the optimal currency composition of external debt. The analysis considers a small open economy facing a perfect world capital market and a large number of perfect commodity markets. The paper derives the optimal currency composition of the country's aggregate assets and external liabilities and describes the necessary estimations and computations, including how to take into account the currency composition of existing external liabilities.
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Bibliographic InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 14.
Date of creation: 30 Jun 1988
Date of revision:
Economic Theory&Research; Environmental Economics&Policies; Fiscal&Monetary Policy; TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT; Financial Intermediation;
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