Commodity-Linked Bonds: A Potential Means for Less-Developed Countries to Raise Foreign Capital
The author suggests that commodity-linked bonds could provide a potential means for less-developed countries (LDCs) to raise money on the international capital markets, rather than through standard forms of financing. The issue of this type of bond could provide an opportunity for commodity-producing LDCs to hedge against fluctuations in their export earnings. The author's results show that the value of a commodity-linked bond increases as the price of the commodity indexed to the bond rises; this suggests that, if LDCs had issued debt contracts that were tied to their main export commodities, then their debt load would decline along with plummeting export prices (or export revenues). A simple portfolio rule derived by the author suggests that LDCs should issue more commodity-linked bonds than conventional debt if the variance of the portfolio is greater than twice the spread between the expected total return of the conventional debt and the commodity-linked bond. This rule supports the view that, if more of the LDCs' debt were issued in the form of commodity-linked bonds, then the debt-service payment of the LDCs would decline along with export prices (or export revenues), thus lightening their debt load.
|Date of creation:||2004|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: 613 782-8845
Fax: 613 782-8874
Web page: http://www.bank-banque-canada.ca/
References listed on IDEAS
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.:
- Rudiger Dornbusch, 1987.
"Our LDC Debts,"
NBER Working Papers
2138, National Bureau of Economic Research, Inc.
- Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
- Ryozo Miura & Hiroaki Yamauchi, 1998. "The Pricing Formula for Commodity-Linked Bonds with Stochastic Convenience Yields and Default Risk," Asia-Pacific Financial Markets, Springer, vol. 5(2), pages 129-158, May.
- R. C. Merton, 1970.
"Optimum Consumption and Portfolio Rules in a Continuous-time Model,"
58, Massachusetts Institute of Technology (MIT), Department of Economics.
- Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
- 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.
- Stanley Fischer, 2002. "Financial Crises and Reform of the International Financial System," NBER Working Papers 9297, National Bureau of Economic Research, Inc.
- Kenneth M. Kletzer & Brian D. Wright, 2000.
"Sovereign Debt as Intertemporal Barter,"
- Kletzer, Kenneth M. & Wright, Brian D., 1998. "Sovereign Debt as Intertemporal Barter," Center for International and Development Economics Research, Working Paper Series qt4qg3c42v, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
- Kenneth M. Kletzer and Brian D. Wright., 1998. "Sovereign Debt as Intertemporal Barter," Center for International and Development Economics Research (CIDER) Working Papers C98-100, University of California at Berkeley.
- Kenneth A. Froot & David S. Scharfstein & Jeremy C. Stein, 1988.
"LDC Debt: Forgiveness, Indexation, and Investment Incentives,"
NBER Working Papers
2541, National Bureau of Economic Research, Inc.
- Froot, Kenneth A & Scharfstein, David S & Stein, Jeremy C, 1989. " LDC Debt: Forgiveness, Indexation, and Investment Incentives," Journal of Finance, American Finance Association, vol. 44(5), pages 1335-50, December.
- Ricardo J. Caballero, 2003. "The Future of the IMF," American Economic Review, American Economic Association, vol. 93(2), pages 31-38, May.
- Krugman, Paul, 1988.
"Financing vs. forgiving a debt overhang,"
Journal of Development Economics,
Elsevier, vol. 29(3), pages 253-268, November.
- Anne Krueger, 2003. "Sovereign Debt Restructuring: Messy or Messier?," American Economic Review, American Economic Association, vol. 93(2), pages 70-74, May.
- Kenen, Peter B, 1990. "Organizing Debt Relief: The Need for a New Institution," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 7-18, Winter.
When requesting a correction, please mention this item's handle: RePEc:bca:bocawp:04-20. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.