HEDGING CURRENCY RISK IN INTERNATIONAL INVESTMENT AND TRADE

International investing and trade has one unintended consequence; namely, the creation of currency risk which causes the local currency value of the foreign receivables or investments to fluctuate dramatically because of pure currency movements. The academic literature on currencies has typically misunderstood currency risk and suggested that currencies have no long term return, are difficult to predict, and difficult to take advantage of as the markets are extremely liquid. Hence, typical recommendations include either that companies and investors should remove this uncompensated volatility by naively hedging back into the base currency or leaving the risk unhedged (which is often misinterpreted and, as a result, left unmanaged). The effective financial management of such cash flows or investments provides a completely different perspective as na�ve hedging (unhedging) of currency risk implies a strong view that the base currency will appreciate (depreciate) against the foreign currency. Moreover, the currency market has many non-profit participants and while exact currency levels cannot be predicted, the future direction of currencies can be anticipated through relatively simple models and non-profit participants can be exploited. We demonstrate how Japanese corporations and investors can develop a much more robust and SMART (Systematic Management of Assets Using a Rules Based Technique) approach to manage currency risk, thereby adding value from currency fluctuations while managing currency risk. In short, they can easily improve performance, risk management and governance. Such transactions are easy to implement with currency forwards and while the current paper focuses on USD exposures, a more general multi-currency approach can be developed for a more comprehensive analysis.

A Model of the EFA Liabilities

The authors describe the liabilities model of the Exchange Fund Account (EFA). The EFA is managed using an asset-liability matching framework that requires currency and duration matching of both sides of the balance sheet. The model chooses the mix of liabilities across instruments and tenors that maximizes the return of the fund subject to a fixed asset-allocation rule and duration matching. The model considers two types of instruments: cross-currency swaps and global bonds. The main trade-off in the model is the cost advantage of cross-currency swaps relative to global bond issuance. Cross-currency swaps are, on average, a cheaper source of funding, but carry counterparty risk. The model penalizes a skewed maturity profile of liabilities because it carries rollover risks. The model also reports the implied asset-liability gap, which is a function of the total amount of cross-currency swaps.Debt Management; Foreign reserves management

Monetary Rules for Small, Open, Emerging Economies

This paper develops a variant of the IMF's Global Economic Model (GEM) suitable to analyze macroeconomic dynamics in open economies, and uses it to assess the effectiveness of Taylor rules and Inflation-Forecast-Based (IFB) rules in stabilizing variability in output and inflation. Our findings suggest that a simple IFB rule that does not rely upon any direct estimates of the equilibrium real interest rate and places a relatively high weight on the inflation forecast may perform better in small open economies than conventional Taylor rules.

Coz: Finding Code that Counts with Causal Profiling

Improving performance is a central concern for software developers. To locate optimization opportunities, developers rely on software profilers. However, these profilers only report where programs spent their time: optimizing that code may have no impact on performance. Past profilers thus both waste developer time and make it difficult for them to uncover significant optimization opportunities. This paper introduces causal profiling. Unlike past profiling approaches, causal profiling indicates exactly where programmers should focus their optimization efforts, and quantifies their potential impact. Causal profiling works by running performance experiments during program execution. Each experiment calculates the impact of any potential optimization by virtually speeding up code: inserting pauses that slow down all other code running concurrently. The key insight is that this slowdown has the same relative effect as running that line faster, thus "virtually" speeding it up. We present Coz, a causal profiler, which we evaluate on a range of highly-tuned applications: Memcached, SQLite, and the PARSEC benchmark suite. Coz identifies previously unknown optimization opportunities that are both significant and targeted. Guided by Coz, we improve the performance of Memcached by 9%, SQLite by 25%, and accelerate six PARSEC applications by as much as 68%; in most cases, these optimizations involve modifying under 10 lines of code.Comment: Published at SOSP 2015 (Best Paper Award

A Floating versus managed exchange rate regime in a DSGE model of India.

We first develop a two-bloc model of an emerging open economy interacting with the rest of the world calibrated using Indian and US data. The model features a financial accelerator and is suitable for examining the effects of financial stress on the real economy. Three variants of the model are highlighted with increasing degrees of financial frictions. The model is used to compare two monetary interest rate regimes: domestic Inflation targeting with a floating exchange rate (FLEX(D)) and a managed exchange rate (MEX). Both rules are characterized as a Taylor-type interest rate rules. MEX involves a nominal exchange rate target in the rule and a constraint on its volatility. We find that the imposition of a low exchange rate volatility is only achieved at a significant welfare loss if the policymaker is restricted to a simple domestic inflation plus exchange rate targeting rule. If on the other hand the policymaker can implement a complex optimal rule then an almost fixed exchange rate can be achieved at a relatively small welfare cost. This finding suggests that future research should examine alternative simple rules that mimic the fully optimal rule more closely.DSGE model, Indian economy, Monetary interest rate rules, Floating versus managed exchange rate, Financial frictions

A Floating versus Managed Exchange Rate Regime in a DSGE Model of India

We first develop a two-bloc model of an emerging open economy interacting with the rest of the world calibrated using Indian and US data. The model features a financial accelerator and is suitable for examining the effects of financial stress on the real economy. Three variants of the model are highlighted with increasing degrees of financial frictions. The model is used to compare two monetary interest rate regimes: domestic Inflation targeting with a floating exchange rate (FLEX(D)) and a managed exchange rate (MEX). Both rules are characterized as a Taylor-type interest rate rules. MEX involves a nominal exchange rate target in the rule and a constraint on its volatility. We find that the imposition of a low exchange rate volatility is only achieved at a significant welfare loss if the policymaker is restricted to a simple domestic in- flation plus exchange rate targeting rule. If on the other hand the policymaker can implement a complex optimal rule then an almost fixed exchange rate can be achieved at a relatively small welfare cost. This finding suggests that future research should examine alternative simple rules that mimic the fully optimal rule more closely. JEL Classification: E52, E37, E58DSGE model, Indian economy, monetary interest rate rules, floating versus managed exchange rate, financial frictions.

Sovereign Default Risk in the Euro-Periphery and the Euro-Candidate Countries

This study examines the key drivers of sovereign default risk in five euro area periphery countries and three euro-candidates that are currently pursuing independent monetary policies. We argue that the recent proliferation of sovereign risk premiums stems from both domestic and international sources. We focus on contagion effects of external financial crisis on sovereign risk premiums in these countries, arguing that the countries with weak fundamentals and fragile financial institutions are particularly vulnerable to such effects. The domestic fiscal vulnerabilities include: economic recession, less efficient government spending and a rising public debt. External ‘push’ factors entail increasing liquidity- and counter-party risks in international banking, as well as risk-hedging appetites of international investors embedded in local currency depreciation against the US Dollar. We develop a model capturing the internal and external determinants of sovereign risk premiums and test for the examined country groups. The results lead us to caution against premature fiscal consolidation in the aftermath of the global economic crisis, since such policy might actually worsen sovereign default risk. The model works well for the euro-periphery countries; it is less robust for the euro-candidates that upon a future euro adoption will have to pursue real economy growth oriented policies in order to mitigate a potential increase in sovereign default risk

A Floating versus Managed Exchange Rate Regime in a DSGE Model of India

We first develop a two-bloc model of an emerging open economy interacting with the rest of the world calibrated using Indian and US data. The model features a financial accelerator and is suitable for examining the effects of financial stress on the real economy. Three variants of the model are highlighted with increasing degrees of financial frictions. The model is used to compare two monetary interest rate regimes: domestic Inflation targeting with a floating exchange rate (FLEX(D)) and a managed exchange rate (MEX). Both rules are characterized as a Taylor-type interest rate rules. MEX involves a nominal exchange rate target in the rule and a constraint on its volatility. We find that the imposition of a low exchange rate volatility is only achieved at a significant welfare loss if the policymaker is restricted to a simple domestic inflation plus exchange rate targeting rule. If on the other hand the policymaker can implement a complex optimal rule then an almost fixed exchange rate can be achieved at a relatively small welfare cost. This finding suggests that future research should examine alternative simple rules that mimic the fully optimal rule more closely.DSGE model, Indian economy, monetary interest rate rules, floating versus managed exchange rate, financial frictions