A Model of the EFA Liabilities
The 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.
|Date of creation:||2011|
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- Campbell, John, 2006.
3157877, Harvard University Department of Economics.
- David Jamieson Bolder, 2006. "Modelling Term-Structure Dynamics for Risk Management: A Practitioner's Perspective," Working Papers 06-48, Bank of Canada.
- Missale, Alessandro, 1999. "Public Debt Management," OUP Catalogue, Oxford University Press, number 9780198290858, March.
- 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.
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