Alternative Financing Instruments for African Economies

Jane Mpapalika

doi:10.4236/jmf.2020.101005

Abstract

This paper investigates the alternative financing instruments that can be used to hedge sovereign risks and finance development in African countries. Many heavily indebted countries are exposed to external risks especially the exchange rate shocks due to limited use of hedging instruments. We propose alternative financing instruments to minimize sovereign risks and the cost of debt. Our paper uses the standard model for pricing options, the Black-Scholes model to determine the fair value of options. The findings show that barrier options have an added advantage over plain vanilla options because of its knock-ins and knock-outs features hence they are the most affordable to use. An important aspect of the effective debt management policies should be on developing local bond market to access alternative financing instruments in the world capital market.

Highlights

This paper investigates the alternative instruments of financing development and hedging risks in African countries
This paper investigates the alternative financing instruments that can be used in the selected African countries to minimise the default risks and finance development
Hedging instruments minimize shocks that are hitting the economy while minimizing the likelihood of sovereign risks and defaults

Summary

Introduction

This paper investigates the alternative instruments of financing development and hedging risks in African countries. Hedging instruments reduce the cost of debt by minimizing the effect of external shocks. Accessing the world capital market as noted by [4] Daniel (2001) would supplement the existing instruments used for financing to reduce the sovereign risks. Managing sovereign risks will assist the policymakers in choosing cost-effective financial instruments to avoid sovereign defaults. Financial instruments consistent with sound debt management practices should reduce the cost of borrowing and the default risks. Despite the increase in financing needs, few studies focus on innovative financing and hedging instruments in African countries. The main contribution is to assess the cost-effective instruments for hedging sovereign risks in African countries.

Related Literature

Theoretical Framework

Data Description

Black Scholes Results

The Partial Derivatives

Conclusions