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Exchange Rate Risk Measurement and Management: Issues and Approaches for Public Debt Managers


  • Michael G. Papaioannou

    (International Monetary Fund)


This paper presents conventional and alternative exchange-rate risk measures for government bonds, and outlines liability management operations for dealing with currency exposure. These risk measures and liability management operations are analyzed from the perspective of a sovereign debt manager. In particular, we examine the VaR statistic as a prominent measure of exchange rate risk exposure, along with an integrated VaR approach for the simultaneous estimation of a bonded portfolio’s interest rate and exchange rate risk; the expected shortfall measure of exchange rate risk; and the spectral risk measure. The liability management operations outlined are debt buybacks, debt swaps and currency derivatives. These operations are extensively used by public debt managers of both developed and emerging market countries to mitigate or eliminate exchange rate risk of public debt portfolios and to reduce external debt servicing costs. Also, the cost at Risk is introduced as an approach to assess debt strategies, and best practices in managing the exchange rate risk exposure of public debt are provided. Further, experiences of external public debt management from selected south-east European countries are offered to illustrate the application of sovereign liability management operations in this region.

Suggested Citation

  • Michael G. Papaioannou, 2009. "Exchange Rate Risk Measurement and Management: Issues and Approaches for Public Debt Managers," South-Eastern Europe Journal of Economics, Association of Economic Universities of South and Eastern Europe and the Black Sea Region, vol. 7(1), pages 7-34.
  • Handle: RePEc:seb:journl:v:7:y:2009:i:1:p:7-34

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    References listed on IDEAS

    1. María Angélica Arbeláez Restrepo & Nouriel Roubini & María Lucía Guerra, 2003. "Interactions between public debt management and debt dynamics and Sustainability: theory and application to Colombia," INFORMES DE INVESTIGACIÓN 002908, FEDESARROLLO.
    2. Joshua Aizenman & Kenneth M. Kletzer & Brian Pinto, 2005. "Sargent-Wallace meets Krugman-Flood-Garber, or: why sovereign debt swaps do not avert macroeconomic crises," Economic Journal, Royal Economic Society, vol. 115(503), pages 343-367, April.
    3. David Jamieson Bolder, 2003. "A Stochastic Simulation Framework for the Government of Canada's Debt Strategy," Staff Working Papers 03-10, Bank of Canada.
    4. Jeremy Bulow & Kenneth Rogoff, 1991. "Sovereign Debt Repurchases: No Cure for Overhang," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1219-1235.
    5. Acerbi, Carlo & Tasche, Dirk, 2002. "On the coherence of expected shortfall," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1487-1503, July.
    6. repec:col:000123:002908 is not listed on IDEAS
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    Cited by:

    1. Samia Omrane, 2012. "An Analysis of Exchange Rate Risk Exposure Related to the Public Debt Portfolio of Tunisia: Beyond VaR Approach," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 59(1), pages 59-87, March.
    2. Christoph Trebesch & Michael G. Papaioannou & Udaibir S Das, 2012. "Sovereign Debt Restructurings 1950-2010; Literature Survey, Data, and Stylized Facts," IMF Working Papers 12/203, International Monetary Fund.

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