Pricing Fund Liquidity Provision

Author/Editor:

Marco Rossi

Publication Date:

February 1, 2007

Electronic Access:

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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:

This paper presents a market-based framework for pricing Fund liquidity assistance that accounts for the credit risk and the insurance benefit involved in such operations. It is based on the isomorphic correspondence between Fund liquidity and common stock put options. Although only illustrative, the simulations presented in this paper show that the value of the liquidity guarantee provided by the Fund could range from a few to over one hundred basis points depending on the borrower's creditworthiness, the volatility of capital flows to the borrowing country, and the amount of funds potentially needed to meet the borrower's external obligations.

Series:

Working Paper No. 07/45

Subject:

English

Publication Date:

February 1, 2007

ISBN/ISSN:

9781451866094/1018-5941

Stock No:

WPIEA2007045

Format:

Paper

Pages:

11

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