TY  - JOUR
AU  - Caballero,Ricardo J.
AU  - Panageas,Stavros
TI  - Contingent Reserves Management: An Applied Framework
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10786
PY  - 2004
Y2  - September 2004
UR  - http://www.nber.org/papers/w10786
L1  - http://www.nber.org/papers/w10786.pdf
N1  - Author contact info:
Ricardo J. Caballero
MIT
Department of Economics
Room E52-373a
Cambridge, MA 02142-1347
Tel: 617/253-0489
Fax: 617/253-6915
E-Mail: caball@mit.edu

Stavros Panageas
University of Chicago
Booth School of Business
5807 South Woodlawn Avenue
Chicago, IL, 60637
Tel: (773) 834 4711
E-Mail: stavros.panageas@chicagobooth.edu
AB  - One of the most serious problems that a central bank in an emerging market economy can face, is the sudden reversal of capital inflows. Hoarding international reserves can be used to smooth the impact of such reversals, but these reserves are seldom sufficient and always expensive to hold. In this paper we argue that adding richer hedging instruments to the portfolios held by central banks can significantly improve the efficiency of the anti-sudden stop mechanism. We illustrate this point with a simple quantitative hedging model, where optimally used options and futures on the S&P100's implied volatility index (VIX), increases the expected reserves available during sudden stops by as much as 40 percent.
ER  -