Access

You are not currently logged in.

Access your personal account or get JSTOR access through your library or other institution:

login

Log in to your personal account or through your institution.

If you need an accessible version of this item please contact JSTOR User Support

The Optimal Currency Composition of External Debt: Theory and Applications to Mexico and Brazil

Stijn Claessens
The World Bank Economic Review
Vol. 6, No. 3 (Sep., 1992), pp. 503-528
Published by: Oxford University Press
Stable URL: http://www.jstor.org/stable/3989983
Page Count: 26
  • Download ($42.00)
  • Cite this Item
If you need an accessible version of this item please contact JSTOR User Support
The Optimal Currency Composition of External Debt: Theory and Applications to Mexico and Brazil
Preview not available

Abstract

The changes in exchange rates, interest rates, and commodity prices during the past decades have had large impacts on developing countries. Many developing countries have limited access to already incomplete international long-term hedging markets. Thus the question arises whether the currency composition of external debt can be used to minimize exposure to external price risk. Using a utility-maximizing framework, this article shows that, by choosing the optimal currency composition, a country can indeed manage its external exposure. The optimal, risk-minimizing currency composition depends on the relation between export receipts and the costs of borrowings in each currency and on the relations among the costs of borrowings in different currencies. A simple methodology can be used to derive the optimal shares of individual currencies and is applied to Mexico and Brazil. The results show that Mexico and Brazil could have lowered their external exposure to a limited degree by continuously altering the currency composition of their debts. The low correlations between the costs of borrowings and export and import prices make the currency composition of debt a very imperfect hedging tool; and it is likely that hedging instruments directly linked to prices are preferable.

Page Thumbnails

  • Thumbnail: Page 
503
    503
  • Thumbnail: Page 
504
    504
  • Thumbnail: Page 
505
    505
  • Thumbnail: Page 
506
    506
  • Thumbnail: Page 
507
    507
  • Thumbnail: Page 
508
    508
  • Thumbnail: Page 
509
    509
  • Thumbnail: Page 
510
    510
  • Thumbnail: Page 
511
    511
  • Thumbnail: Page 
512
    512
  • Thumbnail: Page 
513
    513
  • Thumbnail: Page 
514
    514
  • Thumbnail: Page 
515
    515
  • Thumbnail: Page 
516
    516
  • Thumbnail: Page 
517
    517
  • Thumbnail: Page 
518
    518
  • Thumbnail: Page 
519
    519
  • Thumbnail: Page 
520
    520
  • Thumbnail: Page 
521
    521
  • Thumbnail: Page 
522
    522
  • Thumbnail: Page 
523
    523
  • Thumbnail: Page 
524
    524
  • Thumbnail: Page 
525
    525
  • Thumbnail: Page 
526
    526
  • Thumbnail: Page 
527
    527
  • Thumbnail: Page 
528
    528