The study of municipalities' investment choices : eight Norwegian municipalities' investments in financial products during 2001-2007

Abstract

This paper investigates the change in riskiness of eight Norwegian hydro power municipalities’ investments in complex financial products offered by Citigroup through the brokerage firm Terra Securities AS during the period 2001-2007. The investments were financed by restructuring the municipalities` annual revenue from concession fees and power. Using Monte Carlo simulations, this paper estimates the change in riskiness by comparing the Cash Flow at Risk between two portfolios comprising of (1) restructuring the concession fees and power and investing in Credit Linked Notes, and (2) no restructuring of the concession. Evidence of increased riskiness is found for the eight municipalities when entering into these products.