IMF Working Papers

Monetary Implications of Cross-Border Derivatives for Emerging Economies

Author/Editor:

Armando Méndez Morales

Publication Date:

May 1, 2001

Electronic Access:

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Summary:

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.

Series:

Working Paper No. 2001/058

Subject:

Banking Currencies Derivative markets Exchange rates Financial institutions Financial markets Financial regulation and supervision Foreign exchange Hedging Money Options