Insurance Value of International Reserves: An Option Pricing Approach

Jaewoo Lee

No 2004/175, IMF Working Papers from International Monetary Fund

Abstract: A quantitative framework is developed to bring forward the insurance motive of holding international reserves. The insurance value of reserves is quantified as the market price of an equivalent option that provides the same insurance coverage as the reserves. This quantitative framework is applied to calculating the cost of a regional insurance arrangement (e.g., an Asian Monetary Fund) and to analyzing one leg of an optimal reserve-holding decision.

Keywords: WP; coverage ratio; put option; option price; interest rate; Reserves; insurance; option; underlying asset; insurance value; reserve coverage ratio rise; market value; coverage ratio decrease; reserve holding; Asset valuation; Asset prices; International reserves; Options; Asia and Pacific; Global (search for similar items in EconPapers)
Pages: 28
Date: 2004-09-01
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Citations: View citations in EconPapers (49)

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