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For economic trend watchers, it is no
surprise that developing economies have
emerged as a powerful force in recent
years. Overall, GDP growth of emerging
markets outpaced developed markets
during the economic turmoil of the
past decade, and the role of emerging
nations as global trading partners is
mushrooming.
Economy-boosting activities in these nations, however, also increased
risk management demands, particularly currency risks related to cross-
border borrowing and lending transactions that fuel commerce and
sustainable development.
In response, the sovereign entities and multilateral agencies alike
have turned to emerging markets (EM) derivatives as a currency risk
management solution for various funding activities, most notably so-
called “pesification,” which is the conversion of hard-currency debt to
local currency.
Arsenal of EM derivatives grows
EM derivatives have clearly entered a new era, whether measured in
terms of liquidity, tenors or overall product arsenal. Daily turnover of
over-the-counter interest rate derivatives, for example, quadrupled
from US$25 billion in the early 2000s to nearly $US100 billion last year.
Medium-size markets such as Colombia and Peru, which were totally
absent from the landscape nearly a decade ago, now trade regularly in
long-term swaps. In addition, so-called “frontier currencies,” including
those of Central America and the Caribbean, also are joining the ranks of
EM derivatives.
Emerging Market
Derivatives Provide Risk
Management Relief
Valentina Antill
Latin American
Derivatives, Structured
Products Head,
Citi