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April 2009

GASB 53: New Standards for Derivative and Hedging Activities in the Public Sector

Over the past two decades, the use of derivative instruments by state and local governments has increased significantly. Although derivatives often result from complex financial transactions, governments have discovered their usefulness in lowering borrowing costs, providing up-front cash payments, and reducing the future risk of declining cash flows or asset values. Many governments also use derivative instruments as simple investments intended to generate additional revenues. Examples of derivative instruments commonly used in the public sector include interest rate swaps, forward delivery swaps, “swaptions,” and interest rate caps.

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