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Active Debt Management

Governments can also make use of non-recurring debt exchange transactions, repurchases of government securities to achieve cost-risk objectives and to improve secondary market liquidity.  Debt exchange and repurchase transactions aim at containing refinancing risk, reshaping the maturities profile and facilitating the liquidity and efficiency of government securities on the secondary market.

Derivatives have become important instruments for many sovereigns to manage the risks related to debt management operations as well as to improve the profile of the debt. The use of these instruments by market participants adds to the liquidity in secondary government securities markets. An important policy issue for debt managers and market participants is the relationship between the cash and derivative markets for public debt instruments. There are two important types of links. The first one is based on a complementary effect, whereby liquidity in the two markets tends to be positively related, with trading in the cash market leading to more hedging activities in the futures market. The second link follows from the situation that cash issues and future contracts may act as substitutes for each other, because both markets reflect the same underlying risks.

Transactions in interest rate derivatives (swaps, swap options, cross currency swaps) complement issuing activity to achieve public finance objectives in debt management, by mitigating interest rate and foreign exchange exposures.