Mapping of sovereign risks in small island economies: An application of contingent claim approach to fiji

Figures & data

Figure 1. Four-sector framework of CCA

Source: Gray and Malone (2008).

Figure 2. NIIP/GDP Ratio

Source: Fiji Island Bureau of Statistics and International Financial Statistics (2018).

Table 1. Estimates of key parameters

Year	PV of DB	σDCL$	σAsov$	d1	d2	N(d1)	N(d2)
2014	423.82	9.07	7.64	4.2754	4.1990	0.9999	0.9999
2015	392.31	9.78	8.33	4.6061	4.5228	0.9999	0.9999
2016	417.89	3.92	3.32	2.9062	2.8730	0.9981	0.9979
2017	452.01	7.32	6.27	3.7972	3.7345	0.9999	0.9999

Source: Quarterly RBF Review June 2018 and Author’s estimates

Table 2. Distance and probability to default

Year	Distance to Default (DD)	Implied Probability of Default (IPD)*
2014	2.0230	0.0215
2015	2.0759	0.0189
2016	2.5457	0.0054
2017	2.2642	0.0117

Source: Author’s estimate

Table 3. Comparative analysis of BSM and Naïve

Year	DDm	DDnaive	% diff.	IPDm	IPDnaive	% diff.
2014	2.0230	1.7131	0.31	0.02	0.04	−0.02
2015	2.0759	1.6520	0.42	0.02	0.05	−0.03
2016	2.5457	1.7929	0.75	0.01	0.04	−0.03
2017	2.2643	1.8605	0.40	0.01	0.03	−0.02

Source: Author’s estimate

Figure A1. Real GDP Growth (Annual Percentage Change)

Source: IMF: World economic outlook (October 2019)

Figure A2. General government debt (As percentage of GDP)

Source: IMF: World economic outlook (October 2019)

Table

List of Variables Used
Asov	Implied Value of sovereign assets
σ Asov	Implied Volatility of sovereign assets
σ Asov$	Implied Volatility of sovereign assets in USD
DB	Distress Barrier
DB$	Distress Barrier in USD
DCD	Domestic Currency Debt
DCD$	Domestic Currency Debt in USD
BM	Base Money
BM$	Base Money in USD
FCD	Foreign Currency Debts
DL	Domestic Liabilities
A	Assets
σ A	Volatility of assets
DCL$	Domestic Currency Liabilities in USD
DCL	Domestic Currency Liabilities in local currency
σ DCL$	Volatility of Domestic Currency Liabilities in USD
DCD	Domestic Currency Debt
DCD$	Domestic Currency Debt in USD
σ DCD$	Volatility of Domestic Currency Debt in USD
FR	Forward Rate
σ FR	Volatility of Forward Rate
R,f,t	foreign interest rate up to time
DDsov	Distance to Default or Distress
d1	Conditional probability
d2	Probability adjusted value

Note: σ is volatility, ρ indicates correlation and $ is used to express value in foreign currency

Gray, F., & Malone, W. (2008). Macrofinancial risk analysis. West Sussex UK: John Wiley & Sons Ltd.

 Google Scholar

Data Sources

The sources of data are indicated in A2.