Asset and liability management in the developing countries : modern financial techniques - a primer

The increased volatility of exchange rates, interest rates, and primary commodity prices over the past two decades has highlighted the importance for developing countries of managing these risks. Asset and liability management - a risk-management technique to systematically control price risks with market-based financial instruments - has been developed and broadly used in the industrial countries. However, its applications to developing countries have been limited. The purpose of this paper is to provide a primer of : 1) a concept of asset and liability management applicable to a country, and 2) modern financial instruments and hedging activities with these instruments. To illustrate practical applications of these instruments, several examples of developing country risk-management activities are presented later in the paper. It also discusses some factors that limit the developing countries'use of modern financial tools and considers ways to remove these factors. It concludes with a description of the World Bank's assistance programs in this area.