Understanding municipal derivatives.

The derivatives market for municipal market borrowers has been steadily growing since the market's inception in the mid-1980s. A significant number of state and local governments, ranging from many of the major cities, states, and statewide issuers to smaller, single-purpose governmental entities, have executed derivative transactions. Derivatives have become a key tool for reducing borrowing costs, hedging existing assets and liabilities, improving the strategic timing for market access, optimizing capital market risks in debt and investment portfolios, and enhancing investment returns.

Derivatives also carry risks that issuers must carefully consider before ...