Insurance Value of International Reserves: An Option Pricing Approach

September 1, 2004

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Asset and liability management, Asset prices, Asset valuation, Central banks, Financial institutions, Insurance, International reserves, Options, Prices

Keywords: Asia and Pacific, Asset prices, Asset valuation, coverage ratio, coverage ratio decrease, Global, insurance, insurance value, interest rate, International reserves, market value, option, option price, Options, put option, reserve coverage ratio rise, reserve holding, Reserves, underlying asset, WP

Pages:
28
Volume:
2004
DOI:
https://doi.org/10.5089/9781451858785.001
Issue:
175
Series:
Working Paper No. 2004/175
Stock No:
WPIEA1752004
ISBN:
9781451858785
ISSN:
1018-5941

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