Author(s)

Jane Mpapalika

UN Economic Commission for Africa (UNECA), Macroeconomic Analysis, Economic Governance and Public Finance (MGD) Division, Addis Ababa, Ethiopia.

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.

Financing Instruments, Sovereign Risks, Barrier Options, Pricing Options

Mpapalika, J. (2020) Alternative Financing Instruments for African Economies. Journal of Mathematical Finance, 10, 42-57. doi: 10.4236/jmf.2020.101005.