Incomplete Markets and Commodity-Linked Finance in Developing Countries

Robert Myers ()

The World Bank Research Observer, 1992, vol. 7, issue 1, 79-94

Abstract: This article provides a framework for appraising new financial instruments and evaluating the extent to which they can help alleviate problems of incomplete credit markets and contingent claims markets in developing countries. Although the issues involved apply to any new financial instrument, the author gives particular attention to commodity-linked securities because many developing countries specialize in producing a handful of primary commodities and are therefore exposed to substantial commodity price risks. The article looks at the supply of, demand for, and pricing of commodity-linked securities and discusses some issues that affect their use by developing countries: their special legal status as sovereign debt; their feasibility (since to become truly effective they will require liquid secondary markets); and the construction of an optimal portfolio of external debt obligations. It also discusses the potential for new financial instruments--particularly commodity-linked securities--as a tool for risk management in developing countries. Copyright 1992 by Oxford University Press.

Date: 1992
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