Monetary Implications of Cross-Border Derivatives for Emerging Economies

Armando Méndez Morales

No 2001/058, IMF Working Papers from International Monetary Fund

Abstract: This paper surveys concepts, practices and analytical literature to assess benefits and risks for monetary stability of cross-border currency and interest rate derivative operations in calm and turbulent periods, with a view of extracting implications for emerging economies. Monetary authorities must prevent one-sided positions in the currency, favor asset substitutability, and incorporate the enriched information set provided by derivative-based transactions into monetary policy design. In some circumstances, the use of derivatives by monetary authorities may help fulfill this role. By contrast, surcharges to compensate for a downward impact of derivatives on the cost of capital appear neither advisable nor necessary.

Keywords: WP; interest rate; spot market; short position; derivative market; central bank derivative; economic value; foreign exchange; Options; Monetary Operations; Cross-border financial transactions; convertibility option; strike price; market expectation; market volatility; market valuation; market player; currency risk; options market; currency swap market; Currencies; Exchange rates; Hedging; Derivative markets; Southeast Asia; Africa (search for similar items in EconPapers)
Pages: 40
Date: 2001-05-01
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Citations: View citations in EconPapers (4)

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