According to GFOA, what is essential when using derivatives in government finance?

A comprehensive derivatives policy and ongoing monitoring are essential when using derivatives in government finance because these financial instruments can significantly impact the financial health and risk profile of an organization. Derivative transactions can be complex and may introduce various risks, including counterparty risk, market risk, and liquidity risk.

Having a detailed policy ensures that there are clear guidelines regarding the use of derivatives, including how they align with the government's overall financial strategy and objectives. This policy should outline acceptable types of derivatives, authorized personnel, risk management practices, and the process for evaluating and monitoring these investments.

Ongoing monitoring is crucial as it helps maintain oversight of the derivatives in use, ensuring that any changes in market conditions or organizational risk appetite can be addressed promptly. Continuous assessment allows governments to respond proactively to potential issues, ultimately supporting fiscal responsibility and transparency.

This approach contrasts sharply with the other options, which highlight practices that could lead to poor financial decisions or increased risk exposure. Without internal expertise, high-risk tolerance without documentation, or a focus solely on short-term gains, a governmental organization can easily find itself in precarious financial situations. Hence, having a thorough policy and diligent monitoring is foundational for successfully leveraging derivatives in government finance.