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Sovereign Gold Bonds of Government of India – a risk factored evaluation

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Draft (email comments to tirumalakv@gmail.com) Brief Unconventional monetary instruments carry risks that need to be quantified to help policymakers make an informed decision by allowing an objective cost-benefit analysis.   This paper discusses Sovereign Gold Bonds (SGBs), a unique monetary instrument issued by the Government of India, and quantifies the risk that the government bears while underwriting the guarantee on the future gold price. One way to quantify this risk could be by using Black-Scholes-Merton’s option valuation model. It is seen that quantified risk arrived this way outweighs potential benefits arising from cheaper money raised through SGBs. This helps policymakers to understand the true risk they are undertaking by promising future gold price-linked returns.  Sovereign Gold Bonds (SGBs) Sovereign Gold Bond (SGB) scheme was launched in November 2015. The main objective of SGB is to act as an alternative to purchasing/holding physical gold. These bonds are issued on p