Front Matter
  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund

Front Matter Page

Monetary and Exchange Affairs Department

Authorized for distribution by Patricia Brenner

Contents

  • I. Introduction

  • II. Derivatives, Currency Holdings and Cross-Border Positions

    • A. Convertibility Option Embedded in Domestic Currency Holdings

    • B. Cross-Border Positions and Domestic Currency Holdings

  • III. Recent Evidence of Unstable Financial Inflows and Destabilizing Strategies Related to Derivatives

    • A. Financial Flows Instability

    • B. Destabilizing Strategies

      • Positive feedback

      • Cross hedging

    • C. Consequences of Compensatory Surcharges to the Cost of Capital

  • IV. Cross-Border Derivatives and Monetary Transmission

    • A. Derivatives and Monetary Transmission

    • B. Cross-Border Derivatives and Asset Substitutability

      • Conditions for enhanced asset substitutability

        • Financial development

        • Policy credibility

        • Adequate infrastructure

      • Central bank role

  • V. A Note on the Use of Derivatives by Monetary Authorities

    • A. Central Bank Derivatives to Promote Asset Substitutability

    • B. Central Bank Derivatives to Counteract Short-Term Positions

    • C. Exceptional Uses of Central Bank Derivatives

  • VI. Conclusions

  • References

  • Appendix: Basic Derivative Instruments

  • Figures

  • Figure 1. Merton’s Option-based Model for Valuing Debt and Equity

  • Figure 2. Put Option Embedded in Domestic Currency Holdings

  • Figure 3. Cross-Border Forward Positions

  • Figure 4. Alternative Scenarios

  • Figure 5. Destabilizing Strategies

  • Figure 6. Currency-Hedged Positions

  • Figure 7. Cross-Border Transactions Involving Derivatives

  • Figure 8. Barrier Options

  • Figure 9. Derivatives for Market Development

  • Figure 10. Central Bank Use of Derivatives

Monetary Implications of Cross-Border Derivatives for Emerging Economies
Author: Mr. Armando Méndez Morales