Currency Swaps and Australian Debt Management Practice

This case study examines the controversial practice by the Commonwealth of Australia during the period 1988-2002 of using currency swaps as part of its debt management strategy. Although the strategy provided a positive return overall, the impact of currency swap usage created significant year-by-year variations in returns, which posed a risk to debt interest and financing requirements. This suggests that the risk limits imposed on this strategy were both inappropriate and insufficient. Nonetheless, these findings provide insights into how such a policy could best be implemented given recent proposals (OECD, 2007) for derivatives use by public debt managers.