Domestic Currency Emerging Market Bonds Pricing and Risk Management Aspects

  • Salih N. Neftci University Center of Cuny University of Reading

Abstract

Domestic currency emerging market bonds form an indirect way of trading currency and credit risk. It is true that unlike eurobonds or Bradys, domestic currency emerging market bonds have no default risk in a classical sense. These bonds are issued by local governments and can be paid one way or another by newly issued currency, if need be. Instead, they carry a significant "devaluation risk". In this paper we discuss the environment that supports such bonds, introduce the main parameters and risks, and compare some ways of modelling and pricing these instruments. The paper illustrates that a non-parametric interest rate modelling will be more appropriate for pricing local currency emerging markets bonds.

Author Biography

Salih N. Neftci, University Center of Cuny University of Reading
Graduate School, University Center of Cuny and ISMA Centre, University of Reading
How to Cite
Neftci, S. N. (1). Domestic Currency Emerging Market Bonds Pricing and Risk Management Aspects. Economic Analysis Review, 15(1), 47-59. Retrieved from https://www.rae-ear.org/index.php/rae/article/view/97
Section
Articles