Abstract

http://ssrn.com/abstract=1084683
 
 

Citations



 


 



Contingent Claims Approach to Measuring and Managing Sovereign Risk


Dale F. Gray


International Monetary Fund (IMF); MF Risk

Zvi Bodie


Boston University - Department of Finance & Economics

Robert C. Merton


MIT Sloan School of Management; National Bureau of Economic Research (NBER); Harvard Business School - Finance Unit


Journal of Investment Management, Vol. 5, No. 4, Fourth Quarter 2007

Abstract:     
This paper proposes a new approach to measure, analyze, and manage sovereign risk based on the theory and practice of modern contingent claims analysis (CCA). The paper provides a new framework for adapting the CCA model to the sovereign balance sheet in a way that can help forecast credit spreads and evaluate the impact of market risks and risks transferred rom other sectors. This new framework is useful for assessing vulnerability, policy analysis, sovereign credit risk analysis, and design of sovereign risk mitigation and control strategies. Applications for investors in three areas are discussed. First, CCA provides a new framework for valuing, investing, and trading sovereign securities, including sovereign capital structure arbitrage. Second, it provides a new framework for analysis and management of sovereign wealth funds being created by many emerging market and resource rich countries. Third, the framework provides quantitative measures of sovereign risk exposures which facilitates the design of new instruments and contracts to control or transfer sovereign risk.

Keywords: Contingent claims analysis, sovereignrisk, Merton Model, capital structure arbitrage

JEL Classification: G00

Accepted Paper Series





Not Available For Download

Date posted: January 17, 2008  

Suggested Citation

Gray, Dale F. and Bodie, Zvi and Merton, Robert C., Contingent Claims Approach to Measuring and Managing Sovereign Risk. Available at SSRN: http://ssrn.com/abstract=1084683

Contact Information

JOIM Editor (Contact Author)
Journal of Investment Management (JOIM) ( email )
3658 Mt. Diablo Blvd.
Suite 200
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925-299-7800 (Phone)
925-299-7815 (Fax)
Dale F. Gray
International Monetary Fund (IMF) ( email )
700 19th Street NW
Washington, DC 20431
United States
MF Risk
5921 Searl Terrace
Bethesda, MD 20816
Zvi Bodie
Boston University - Department of Finance & Economics ( email )
595 Commonwealth Avenue
Boston, MA 02215
United States
617-353-4160 (Phone)
617-353 6667 (Fax)
HOME PAGE: http://smgnet.bu.edu/mgmt/profiles/BodieZvi.html
Robert C. Merton
MIT Sloan School of Management ( email )
77 Massachusetts Avenue
E62-634
Cambridge, MA 02139-4307
United States
617 715 4866 (Phone)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Harvard Business School - Finance Unit ( email )
Boston, MA 02163
United States
617-495-6678 (Phone)
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