Contingent reserves management
Subtitle: an applied framework
By: Ricardo J. Caballero [and] Stavros Panageas
Contributors: Panageas, Stavros; Massachusetts Institute of Technology. Dept. of Economics
Series: Working paper series / Massachusetts Institute of Technology, Dept. of Economics -- working paper 04-32; Working paper (Massachusetts Institute of Technology. Dept. of Economics) -- no. 04-32.
Publisher: Massachusetts Institute of Technology, Dept. of Economics
Published: 2004
Place of publication: Cambridge, MA
Language: eng
Number of pages: 25
Description: One of the most serious problems that a central bank in an emerging market economy can face, is the sudden reversal of capital inflows. Hoarding international reserves can be used to smooth the impact of such reversals, but these reserves are seldom sufficient and always expensive to hold. In this paper we argue that adding richer hedging instruments to the portfolios held by central banks can significantly improve the efficiency of the anti-sudden stop mechanism. We illustrate this point with a simple quantitative hedging model, where optimally used options and futures on the S&P100's implied volatility index (VIX), increases the expected reserves available during sudden stops by as much as 40 percent. Keywords: Sudden stops, reserves, portfolio, VIX, hedging, options, futures. JEL Classifications: E2, E3, F3, F4, G0, C1.
Notes: "September 9, 2004."

Includes bibliographical references (p. 25).

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