Management of Commodity Price Risks on Sovereign Balance Sheets<sup>1</sup>

Jukka Pihlman

in Sovereign Wealth Funds and Long-Term Investing

Published by Columbia University Press

Published in print November 2011 | ISBN: 9780231158633
Published online November 2015 | e-ISBN: 9780231530286 | DOI:
Management of Commodity Price Risks on Sovereign Balance Sheets1

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For commodity-producing countries, commodities can be a blessing and a curse: They provide a huge part of countries' revenues, but they are very volatile and can be temporary or finite. The International Monetary Fund (IMF) is interested in these issues and approaches them from various angles: fiscal management, sovereign balance sheet, and risk management. It also provides technical assistance to countries in managing these challenges in all of these areas. This chapter discusses three main approaches to managing these risks: direct hedging through derivatives, indirect hedging through stabilization funds and other sovereign wealth funds (SWFs), and indirect hedging through debt management operations. The most common strategy for managing price volatility is indirect hedging through stabilization funds and other SWFs. The idea behind stabilization funds is simply to save excess revenue when commodity prices are high and to use these savings when commodity prices are low so as to smooth government expenditures and consumption.

Keywords: International Monetary Fund; IMF; price volatility; risk management; direct hedging; derivatives; indirect hedging; sovereign wealth funds; SWF; stabilization funds

Chapter.  528 words. 

Subjects: Financial Markets

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