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Pricing Fund Liquidity Provision

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  • Mr. Marco Rossi

Abstract

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.

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  • Mr. Marco Rossi, 2007. "Pricing Fund Liquidity Provision," IMF Working Papers 2007/045, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2007/045
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    References listed on IDEAS

    as
    1. Barone-Adesi, Giovanni & Whaley, Robert E, 1987. "Efficient Analytic Approximation of American Option Values," Journal of Finance, American Finance Association, vol. 42(2), pages 301-320, June.
    2. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    3. Marco Rossi, 1998. "Payment Systems in the Financial Markets," Palgrave Macmillan Books, Palgrave Macmillan, number 978-1-349-26374-5, October.
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