Dobronogov, AntonGelb, AlanBrant Saldanha, Fernando2014-08-152014-08-152014-06https://hdl.handle.net/10986/19372Natural resources are being discovered in more countries, both rich and poor. Many of the new and aspiring resource exporters are low-income countries that are still receiving substantial levels of foreign aid. Resource discoveries open up enormous opportunities, but also expose producing countries to huge trade and fiscal shocks from volatile commodity markets if their exports are highly concentrated. A large literature on the "resource curse" shows that these are damaging unless countries manage to cushion the effects through countercyclical policy. It also shows that the countries least likely to do so successfully are those with weaker institutions, and these are most likely to remain as clients of the aid system. This paper considers the question of how donors should respond to their clients' potential windfalls. It discusses several ways in which the focus and nature of foreign aid programs will need to change, including the level of financial assistance. The paper develops some ideas on how a donor like the International Development Association might structure its program of financial transfers to mitigate volatility. The paper outlines ways in which the International Development Association could use hedging instruments to vary disbursements while still working within a framework of country allocations that are not contingent on oil prices. Simulations suggest that the International Development Association could be structured to provide a larger degree of insurance if it is calibrated to hedge against large declines in resource prices. These suggestions are intended to complement other mechanisms, including self-insurance using Sovereign Wealth Funds (where possible) and the facilities of the International Monetary Fund.en-USCC BY 3.0 IGOACCOUNTINGAGRICULTUREALLOCATIONALTERNATIVE SCENARIOSARBITRAGEAVERAGE PRICEBALANCE OF PAYMENTSBANK ACCOUNTBENCHMARKBONDBOND MARKETSBONDSBOOM-BUST CYCLESBORROWERBROKERBROKERAGEBROKERSBUDGET PERFORMANCECALL OPTIONCALL OPTIONSCAPITAL FLOWSCAPITAL GAINSCAPITAL MARKETSCASH FLOWCASH FLOW RISKCASH FLOWSCASH RESERVESCLIMATECOLLATERALCOLLATERAL REQUIREMENTSCOMMODITIESCOMMODITYCOMMODITY MARKETSCOMMODITY PRICESCOUNTRY RISKCREDIT EXPOSURECREDIT GUARANTEECREDIT LINECREDIT RISKCREDIT RISKSCREDIT-WORTHINESSCREDITORCREDITWORTHINESSDEFAULTSDEPOSITSDERIVATIVEDERIVATIVE TRANSACTIONSDERIVATIVESDEVELOPING COUNTRIESDEVELOPING COUNTRYDEVELOPMENT ASSISTANCEDEVELOPMENT BANKDEVELOPMENT POLICYDEVELOPMENT PROJECTSDISBURSEMENTDISBURSEMENTSDIVIDENDDIVIDENDSDRAWN DOWNDROUGHT INSURANCEENTRY POINTSEXOGENOUS SHOCKSEXPECTED VALUEEXPENDITUREEXPENDITURESEXPORTEREXPORTERSEXPORTSEXPOSUREEXTERNAL SHOCKSEXTREME EVENTSFINANCIAL ASSISTANCEFINANCIAL CONTRACTFINANCIAL DEVELOPMENTFINANCIAL FLOWSFINANCIAL INSTRUMENTSFINANCIAL PRODUCTSFINANCIAL RESOURCESFINANCIAL SECTORFINANCIAL SERVICESFINANCIAL SUPPORTFINANCIAL TRANSFERSFISCAL POLICYFIXED INCOMEFORMAL ANALYSISFORWARD CONTRACTFORWARD CONTRACTSFUEL PRICESFUTURESFUTURES CONTRACTFUTURES CONTRACTSFUTURES MARKETFUTURES MARKETSGDPGLOBAL FUNDGOVERNMENT POLICIESGOVERNMENT REVENUEGOVERNMENT SPENDINGHEDGESIMPLIED VOLATILITYINCOME INSTRUMENTSINCOME TAXINCOMESINSTRUMENTINSURANCEINTEREST RATEINTEREST RATESINTERNATIONAL BANKINTERNATIONAL DEVELOPMENTINTRINSIC VALUEINVESTINGINVESTMENT MANAGEMENTINVESTMENT PROJECTSLEVEL OF COMMITMENTSLEVEL OF RISKLIABILITYLIQUIDITYLOANLOAN AGREEMENTSLOCAL CURRENCYLOW-INCOME COUNTRIESLOWER PRICEMACROECONOMIC FLUCTUATIONSMACROECONOMIC LEVELMACROECONOMIC POLICYMACROECONOMIC STABILITYMACROECONOMIC STABILIZATIONMARGIN ACCOUNTMARGIN REQUIREMENTSMARKET CONDITIONSMARKET PRICEMARKET PRICESMATURITYMIDDLE INCOME COUNTRIESMONETARY FUNDMORAL HAZARDMULTILATERAL DEVELOPMENTNATIONAL ACCOUNTSNATIONAL INCOMENATURAL DISASTERSNATURAL RESOURCENATURAL RESOURCESNET COSTOIL PRICEOIL PRICESOIL PRODUCTIONOIL RESOURCEOIL SECTOROUTPUTOUTPUT LOSSPOLICY IMPLICATIONSPORTFOLIOPOWER SECTORPRESENT VALUEPRICE BANDPRICE BENCHMARKSPRICE CHANGESPRICE FLOORPRICE INCREASESPRICE INSTABILITYPRICE LEVELPRICE LEVELSPRICE MOVEMENTSPRICE OF OILPRICE RISKPRICE RISKSPRICE TRENDSPRICE VARIATIONPRICE VARIATIONSPRICE VOLATILITYPRIVATE CAPITALPRIVATE CAPITAL FLOWSPROBABILITY DENSITYPROBABILITY DISTRIBUTIONPRODUCTION COSTSPUBLIC INVESTMENTPURCHASE PRICEPURCHASINGPUT OPTIONPUT OPTIONSRANDOM WALKREAL EXCHANGE RATEREINSURANCERESERVERESERVESRISK EXPOSURESRISK MANAGEMENTRISK NEUTRALSAVINGSSCENARIOSSET ASIDESINGLE CALLSPOT MARKETSPOT PRICESPOT PRICESSUPPLY CONTRACTSWAPSTAXTAX REVENUESTAXATIONTECHNICAL ASSISTANCETOTAL COSTTOTAL FACTOR PRODUCTIVITYTRADE DATETRADESTRADINGTRANSACTIONTRANSACTION COSTTRANSFER PRICETREASURYVOLATILITIESWEALTHWORLD MARKETWORLD MARKETSWORST-CASE10.1596/1813-9450-6952