Optimal currency composition of developing countries foreign dept application to Turkey

Abstract

ABSTRACT Over the last decade, Developing Countries have been affected by large changes in cross currency exchange rafes and in commodity prices. These changes have affected both the structure and the level of the countries external obligations. Developing Countries have the possibility of hedging against exchange rate changes by buying currency futures or some other hedging instruments through organized markets. However, most Developing Countries, due to institutional and credit constraints, are unable to enter to these markets. What is available to all countries what can be used as an alternative to hedging instruments in reducing exchange risk exposure is the currency composition of foreign debt. By using their currency composition of foreign debt, countries can minimize their exposure against the exchange rate changes. In this study I applied the theoretical analysis to Turkey by using an econometric model called Autoregressîve Conditional Heteroscedastîcîty (ARCH). According to the results Turkey could manage her external exposures more effectively if she structures her external debt optimally by having an access Jo organized currency futures and other hedging markets even though she has limited capacity to them.