Insurance Value of International Reserves: An Option Pricing Approach
IMF Working Papers, September 1, 2004
Source details
- Canonical URL
- Insurance Value of International Reserves: An Option Pricing Approach
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Bibliographic details
- Authors: Jaewoo Lee
- Published: September 1, 2004
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451858785.001
Overview and purpose
- 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.
- The framework is applied to:
- calculating the cost of a regional insurance arrangement (e.g., an Asian Monetary Fund), and
- analyzing one leg of an optimal reserve-holding decision.
Key findings and analytical approach
- Insurance value of reserves is mapped to the market price of an equivalent option.
- The option-pricing perspective provides a quantitative measure for reserve insurance coverage.
- Application areas highlighted:
- regional insurance arrangement cost estimation,
- formal analysis of reserve-holding decisions using option-equivalent valuations.
Subjects and keywords (as listed)
- Subjects: 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