Insurance Value of International Reserves: An Option Pricing Approach

28 Pages Posted: 15 Feb 2006

See all articles by Jaewoo Lee

Jaewoo Lee

International Monetary Fund (IMF) - Research Department

Date Written: September 2004

Abstract

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. This quantitative framework is applied to calculating the cost of a regional insurance arrangement (e.g., an Asian Monetary Fund) and to analyzing one leg of an optimal reserve-holding decision.

Keywords: Reserves, insurance, option, underlying asset

JEL Classification: F31, F41

Suggested Citation

Lee, Jaewoo, Insurance Value of International Reserves: An Option Pricing Approach (September 2004). IMF Working Paper, Vol. , pp. 1-28, 2004. Available at SSRN: https://ssrn.com/abstract=879000

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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