Apr 3, 2013

FX Derivatives in Emerging Markets

Research and backward glances around the 2008 financial crisis often reference dark points in the derivatives industry, but a recent Bank of International Settlements (BIS) Quarterly Review offers a bright note with a study of FX hedges use by Chilean corporations.

Compared to other emerging market economies, Chile fared better than many of its peers - both inside and beyond Latin America. Numerix FX expert Udi Sela joins CMO and host James Jockle to discuss this new research highlighting the role FX derivatives may have played in the liquidity and resilience of its corporates, economy and derivatives markets.

Weigh in and continue the conversation on Twitter @nxanalytics, LinkedIn, or in the comments section below.


Video Transcript: FX Derivatives in Emerging Markets: Chilean Hedges and the Crisis

Jim Jockle (Host): A highlight has come out for derivatives usage in the Bank of International Settlements Report, as it relates to the use of FX hedges by the Chile to weather the storm through the Lehman Crisis, with me today, Udi Sela of Numerix, how are you Udi?  

Udi Sela (Guest): Thank you, nice being here Jim. Thank you.   

Jockle: Udi walk us through elements of the report. What was Chile doing in terms of hedging to recent market exposures?

Sela: Okay so let’s just be accurate, this is not really the Chilean Government, we’re talking here about the Chilean Banks, and the idea was unlike previous events occurring in emerging markets, the Chilean Corporates were hedged against FX exposure, so when the local currency was devalued, the local corporates did not take major hits, as oppose to crisis that we saw in similar cases in Korea, India, Brazil, and Mexico and so forth. This is basically what bis.org wanted to highlight.  

Jockle: And one of the elements that it highlighted was also that it went beyond just base level hedging and it was almost over hedging in many different ways. What kind of strategies do you think were being employed at that point and time. 

Sela: Well I would suspect that first of all these were mostly buy-only strategies, or strategies that involve banks sell but when the sell is in the right direction, in the sense that if the local country weakens, than it is good for the exporters.

Jockle: And looking ahead, what do you expect in terms of changes in the regulatory environment and the way that some emerging market banks are going to be looking at FX derivatives?

Sela: So in general I would say that still central banks would be cautious because of the misuse of exotic options in a way that was not really beneficial for corporates, so without really understanding what the risks associated with those trades were, I do think that central banks and governments would encourage putting good risk practices in place and usage of derivatives in a more beneficially intelligent way. I don’t think they will discourage people from using, but I think the requirement would be understanding what you do, because this was the main concern over the various crisis’ that we have crossed in the last few years.

Jockle: Udi thank you and the publication is available on the bis.org website, in terms of the case study it was part of the Quarterly Review. Udi thank you so much for joining us today and giving a little bit more color and insight on this recent publication.

Sela: Thank you my pleasure.

Jockle: And again, please feel free to follow Udi on LinkedIn, or join the conversation on twitter @nxanalytics or on our blog. Your feedback keeps us going. Thank you and have a great day.

Sela: Thank you.

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