Which of the following types of investment does GFOA state that governments should exercise caution when considering or avoid altogether?

The Government Finance Officers Association (GFOA) advises that certain types of investments can pose significant risks to government entities. This recommendation is rooted in the need for safeguarding public funds and ensuring financial stability.

Derivatives, for example, can be highly complex financial instruments that derive their value from underlying assets or benchmarks. While they can be used for hedging and risk management, they also carry inherent risks such as market volatility and counterparty risk that may not align with the conservative investment strategies typically favored by government entities.

Commercial paper, despite being a short-term investment, also necessitates caution. Its credit risk and the dependence on the issuer’s financial health can be concerning, especially in volatile markets. Governments need to be cautious about liquidity and the potential impact on their cash flow.

Reverse repos (reverse repurchase agreements) can similarly introduce risks, particularly concerning liquidity management. They involve selling a security and agreeing to repurchase it at a later date, which can lead to complications if the government faces cash flows or if the value of the securities changes unfavorably.

Considering these factors, the GFOA's guidance to exercise caution or avoid altogether investments like derivatives, commercial paper, and reverse repos is underscored by the need to maintain a conservative investment approach