Optimal Asset and Debt Portofolios: an Hedging

Strategy

Abel M. Mateus† Sweder van Wijnbergen‡

November 14th, 1996

There have been few contributions to the theory of the optimal portfolio

of a central bank and national treasuries. In fact, most of the theory of

optimal debt regards only the level of such debt and the theory of optimal

portfolios although giving information on the currency composition does

not apply to the national problem. This paper develops an integrated

approach and gives special emphasis to the hedging strategies of monetary

authorities to decrease the risk of external trade actuations. The

model is then applied to the case of Portugal and simulations show that

a significant improvement in the net external position of the monetary

authorities can be achieved.