publication . Article . 2002

Pricing currency risk under currency boards

Sergio L Schmukler; Luis Servén;
Open Access English
  • Published: 01 Dec 2002
  • Publisher: Elsevier
  • Country: United States
Abstract
Currency risk is one of the two components of the total interest rate differential. Hard pegs, such as currency boards, are meant to reduce or even eliminate currency risk, thus reducing domestic interest rates. This paper investigates the patterns and determinants of the currency risk premium in two currency boards, Argentina and Hong Kong. Despite the presumed rigidity of currency boards, the currency premium is almost always positive and at times very large. Its term structure is usually upward sloping, but flattens out or even becomes inverted at times of turbulence. The premium and its term structure depend on domestic and global factors, related to devalua...
Subjects
free text keywords: currency risk, currency premium, forward discount, currency board, term structure, covered interest parity, karket segmentation, financial crises, Economics and Econometrics, Development, Local currency, Exchange-rate regime, Currency, Financial system, Dual currency deposit, Economics, Microeconomics, Devaluation, Hard currency, Foreign exchange risk
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publication . Article . 2002

Pricing currency risk under currency boards

Sergio L Schmukler; Luis Servén;