Pricing Fund Liquidity Provision
Electronic Access:
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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. 2007/045
Subject:
Asset prices Credit risk International capital markets Liquidity SDR interest rate
English
Publication Date:
February 1, 2007
ISBN/ISSN:
9781451866094/1018-5941
Stock No:
WPIEA2007045
Pages:
11
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