The optimal currency composition of external debt
The 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.
|Date of creation:||30 Jun 1988|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (202) 477-1234
Web page: http://www.worldbank.org/
More information through EDIRC
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.:
- Dornbusch, Rudiger, 1987.
"Exchange Rates and Prices,"
American Economic Review,
American Economic Association, vol. 77(1), pages 93-106, March.
- 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.
- R. C. Merton, 1970. "Optimum Consumption and Portfolio Rules in a Continuous-time Model," Working papers 58, Massachusetts Institute of Technology (MIT), Department of Economics.
- Jorion, Philippe, 1985. "International Portfolio Diversification with Estimation Risk," The Journal of Business, University of Chicago Press, vol. 58(3), pages 259-78, July.
- Fischer, Stanley, 1975. "The Demand for Index Bonds," Journal of Political Economy, University of Chicago Press, vol. 83(3), pages 509-34, June.
- Gemmill, Gordon, 1985. "Optimal hedging on futures markets for commodity-exporting nations," European Economic Review, Elsevier, vol. 27(2), pages 243-261, March.
- Breeden, Douglas T., 1979. "An intertemporal asset pricing model with stochastic consumption and investment opportunities," Journal of Financial Economics, Elsevier, vol. 7(3), pages 265-296, September.
- Adler, Michael & Dumas, Bernard, 1980. "The Exposure of Long-Term Foreign Currency Bonds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(04), pages 973-994, November.
When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:14. 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: (Roula I. Yazigi)
If references are entirely missing, you can add them using this form.