Economics at your fingertips  

Commodity indexed debt in international lending

Timothy Besley () and Andrew Powell

No 161, Policy Research Working Paper Series from The World Bank

Abstract: Superficially, commodity-indexed bonds resemble a combination of a debt and a contract in futures. They are particularly useful in a country dependent on a single commodity for which prices are volatile. These financial instruments involve a tradeoff between gains in risk-sharing and a deterioration in incentives. The precise costs and benefits of commodity-contingent contracts in international lending depend on the model employed. Commodity indexing seems to work best when : (i) the borrower is heavily concentrated in a commodity for which prices are so volatile that income fluctuates greatly; (ii) information is fully available about how borrowed funds are used and thus whether conditionality is meaningful; the borrower has no control over the index used in the contingent contract; and (iv) there is a low"beta"between returns on the commodity and returns from the rest of the lenders portfolio. Many of the arguments made for a commodity-dependent borrower may also be made for countries subject to other risks, for example, a country that has borrowed largely in dollars and is thereby exposed to high currency risks.

Keywords: Banks&Banking Reform; Economic Adjustment and Lending; Economic Theory&Research; Environmental Economics&Policies; Financial Intermediation (search for similar items in EconPapers)
Date: 1989-03-31
References: Add references at CitEc
Citations: Track citations by RSS feed

Downloads: (external link) ... d/PDF/multi_page.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this paper

More papers in Policy Research Working Paper Series from The World Bank 1818 H Street, N.W., Washington, DC 20433. Contact information at EDIRC.
Bibliographic data for series maintained by Roula I. Yazigi ().

Page updated 2021-12-01
Handle: RePEc:wbk:wbrwps:161