Monetary Implications of Cross-Border Derivatives for Emerging Economies

IMF Working Papers, May 1, 2001

Source details

Canonical URL: Monetary Implications of Cross-Border Derivatives for Emerging Economies

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.

Cross-border currency and interest rate derivative operations affect monetary stability differently in calm and turbulent periods; the paper assesses benefits and risks across these states.
Derivative-based transactions provide an enriched information set that should be incorporated into monetary policy design.
Preventing one-sided positions in the currency is identified as a necessary action for monetary authorities.
Favoring asset substitutability is recommended to mitigate risks associated with derivatives.
Use of derivatives by monetary authorities can, in some circumstances, assist in achieving the goals above.
Surcharges intended to offset a downward impact of derivatives on the cost of capital are characterized as neither advisable nor necessary.

Monetary authorities should prevent one-sided positions in the currency.
Monetary authorities should favor asset substitutability.
Monetary policy design should incorporate information from derivative-based transactions.
Consideration of direct use of derivatives by monetary authorities where appropriate.
Do not implement surcharges aimed at compensating for a derivatives-induced reduction in the cost of capital.

Subject: Banking, Currencies, Derivative markets, Exchange rates, Financial institutions, Financial markets, Financial regulation and supervision, Foreign exchange, Hedging, Money, Options
Keywords: Africa, central bank derivative, convertibility option, Cross-border financial transactions, Currencies, currency risk, currency swap market, derivative market, Derivative markets, economic value, Exchange rates, foreign exchange, Hedging, interest rate, market expectation, market player, market valuation, market volatility, Monetary Operations, Options, options market, short position, Southeast Asia, spot market, strike price, WP

Monetary Implications of Cross-Border Derivatives for Emerging Economies - WP/01/58
- Monetary Implications of Cross-Border Derivatives for Emerging Economies - WP/01/58 (Markdown version)
- Monetary Implications of Cross-Border Derivatives for Emerging Economies - WP/01/58 (PDF)