derivatives

Financial Engineering by City Governments: Factors Associated with the Use of Debt-related Derivatives

May 8, 2019 // 0 Comments

Akheil Singla and Martin J. Luby| The use of financial derivatives, such as interest rate swaps, by city governments has been covered in the news media with some frequency over the past few years. The preponderance of these stories focus on the negative outcomes associated with these financial instruments, particularly in terms of increased interest payments, termination payments or other financial losses. While reporting on the issue often stops with simply stating the losses, some media accounts call into question the use of these instruments by governments at all, suggesting that governments 1) lack the financial sophistication to engage in these deals, 2) use the instruments out of desperation because of a declining financial health, 3) are increasingly staffed with finance professionals either at the administrative or board level that have experience with more complex financial instruments in their previous professional careers which leads to greater use and/or 4) are being influenced by financial sector firms that will benefit from the use of these financial instruments. Read More