The Public Debt Management Newtwork

Derivatives have become important instruments for many sovereigns to manage the risks related to debt management operations as well as for improving the profile of the debt. The use of these instruments by market participants adds to the liquidity in secondary government securities markets. In general, derivatives and risk management instruments can be used by both the debt managers and market participants to protect the value of an investment or transform the characteristics of assets or liabilities into alternative, more desirable forms. An important policy issue for debt managers and market participants is the relationship between the cash and derivative markets for public debt instruments, especially the use of futures and swaps for trading and hedging purposes. 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.

In that situation, liquidity would be inversely related in the two markets.

This policy area includes a discussion on how:

• debt managers participate in the derivative market activity;
• futures and forward contracts can provide the ability to hedge risks;
• options and swaps have become indispensable risk management tools; and case studies in selected OECD debt markets.

Sample Documents

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Documents

• Dai Qiang, Singleton Kenneth

  Fixed Income Pricing (2002)

  More Info on Fixed Income Pricing