Handbook of Exchange Rates

19.5 Techniques of Reserve Management

Reserve management is not static and is a constant trade-off between the three objectives of safety, liquidity, and return. These can vary considerably over time, as we have seen over the past several years. The challenge for reserve managers has several dimensions. First is to map the uses of the reserves in clear trade-offs between risk and return, second is to clearly define the risk preference/tolerance level, and third is to create a portfolio structure that reflects these decisions. (Source: BIS Papers # 38) Consequently, it is a constantly evolving process of balancing policy, market, economic, and political objectives.