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Lessons in Structuring Derivatives Exchanges

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  • Tsetsekos, George
  • Varangis, Panos
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    Abstract

    The global deregulation of financial markets has created new investment opportunities, which in turn require the development of new instruments to deal with the increased risks. Institutional investors who are actively engaged in industrial and emerging markets need to hedge their risks from these cross-border transactions. Agents in liberalized market economies who are exposed to volatile commodity price and interest rate changes require appropriate hedging products to deal with them. And the economic expansion in emerging economies demands that corporations find better ways to manage financial and commodity risks. The instruments that allow market participants to manage risk are known as derivatives because they represent contracts whose payoff at expiration is determined by the price of the underlying asset -- a currency, an interest rate, a commodity, or a stock. Derivatives are traded in organized exchanges or over the counter by derivatives dealers. Since the mid-1980s the number of derivatives exchanges operating in both industrial and emerging-market economies has increased substantially. What benefits do these ex- changes provide to investors and to the home country? Are they a good idea? Emerging markets can capture important benefits, including the ability to transfer risks, enhance public information, and lower transaction costs, but the success of a derivatives exchange depends on the soundness of the foundations on which it is built, the structure that is adopted, and the products that are traded.

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    Bibliographic Info

    Article provided by World Bank Group in its journal World Bank Research Observer.

    Volume (Year): 15 (2000)
    Issue (Month): 1 (February)
    Pages: 85-98

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    Handle: RePEc:oup:wbrobs:v:15:y:2000:i:1:p:85-98

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Gerard Gennotte and Hayne Leland., 1991. "Low Margins, Derivative Securities, and Volatility," Research Program in Finance Working Papers RPF-211, University of California at Berkeley.
    2. Peter M. Garber, 1998. "Derivatives in International Capital Flows," NBER Working Papers 6623, National Bureau of Economic Research, Inc.
    3. Ludger Hentschel & Clifford W. Smith, 1994. "Risk And Regulation In Derivatives Markets," Journal of Applied Corporate Finance, Morgan Stanley, vol. 7(3), pages 8-22.
    4. Domowitz, Ian, 1995. "Electronic derivatives exchanges: Implicit mergers, network externalities, and standardization," The Quarterly Review of Economics and Finance, Elsevier, vol. 35(2), pages 163-175.
    5. Peter A. Abken, 1994. "Over-the-counter financial derivatives: risky business?," Economic Review, Federal Reserve Bank of Atlanta, issue Mar, pages 1-22.
    6. Eli M. Remolona, 1992. "The recent growth of financial derivative markets," Quarterly Review, Federal Reserve Bank of New York, issue Win, pages 28-43.
    7. Louis O. Scott, 1992. "The Information Content of Prices in Derivative Security Markets," IMF Staff Papers, Palgrave Macmillan, vol. 39(3), pages 596-625, September.
    8. Tsetsekos, George & Varangis, Panos, 1998. "The structure of derivatives exchanges : lessons from developed and emerging markets," Policy Research Working Paper Series 1887, The World Bank.
    9. Sean Becketti, 1993. "Are derivatives too risky for banks?," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 27-42.
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    Cited by:
    1. Lourdes TreviƱo, 2005. "Development and volume growth of organized derivatives trade in emerging markets," Ensayos Revista de Economia, Universidad Autonoma de Nuevo Leon, Facultad de Economia, vol. 0(2), pages 31-82, November.

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