The New Zealand Debt Management Office, which runs an approximately NZD36 billion (USD20.9 billion) debt portfolio on behalf of the government, is considering using interest rate and foreign exchange options for the first time. "Options would be useful in enabling us to broaden our range of funding products [and would] enable us to more effectively hedge our fx exposure," said Philip Combes, treasurer in Wellington. Combes explained that the debt agency is looking at issuing bonds with embedded interest rate options as well as using fx options to hedge outstanding positions.
"Options would be preferable in some cases rather than taking an outright position," he said, adding that the agency is already an active user of swaps. Combes noted that the office has been studying the products and will soon approach the treasury and the government for approval. "This may take some time as we will be expected to present a business case," explained Combes. He declined to comment on a possible timeframe or further elaborate on details of the products.
"We've been doing a lot of leg work," he said, adding, it has spoken with several international derivatives houses about the project.
The debt agency already uses interest rate and foreign exchange swaps to manage risk. For foreign currency issuance, Combes said, "We typically swap to dollars or in some cases euro." The debt office has outlined its plans to issue a total of NZD2.5 billion of debt in the domestic market. "For foreign issuance, we take an opportunistic approach and look at proposals given to us," he added.
As for derivative counterparties, it deals with both local and international houses, selecting firms on the basis of price.