Option Pricing Approach to International Reserves

17 Pages Posted: 15 Oct 2009

See all articles by Jaewoo Lee

Jaewoo Lee

International Monetary Fund (IMF) - Research Department

Abstract

This paper brings forward the insurance aspect of holding reserves by using the conceptual equivalence between insurance and financial options, and explores when reserves are likely to become the primary means of precautionary arrangement, in particular in emerging markets. The sharp rise in the amount of reserves held by many emerging markets since the mid-1990s can be traced to the rise in the “globalization hazard” that confronts emerging markets. A modest probability of globalization hazard (sudden stop) can induce emerging markets to self-insure fully by hoarding international reserves, rather than relying on nonreserve alternatives of taking precautions.

Suggested Citation

Lee, Jaewoo, Option Pricing Approach to International Reserves. Review of International Economics, Vol. 17, Issue 4, pp. 844-860, September 2009. Available at SSRN: https://ssrn.com/abstract=1489038 or http://dx.doi.org/10.1111/j.1467-9396.2009.00849.x

Jaewoo Lee (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-7331 (Phone)
202-623-6334 (Fax)

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