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Emerging Derivatives Markets: The Case of Chile

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  • VIVIANA FERNANDEZ

Abstract

Despite impressive growth in derivatives markets around the world, there is considerable heterogeneity in the degree of development across countries. In Latin America, derivatives markets in Chile lag far behind those in Brazil and Argentina. What accounts for these differences? The analytical pricing machinery of Black and Scholes (1973), as well as the voluminous literature on contingent claims that has developed since, is freely available, so the answer probably lies in institutional and legal factors. We discuss different institutional aspects of derivatives markets in Chile and simulate the potential benefit for hedgers of using these instruments. Specifically, under different scenarios, most currency risk may be reduced by rolling-the-hedge strategies involving Chilean peso-U.S. dollar (CLP/USD) forwards. In our view, low liquidity of spot markets, high trading costs, and stringent regulations governing institutional investors--in particular, pension funds--appear to be driving factors in the thinness of the domestic derivatives market.

Suggested Citation

  • Viviana Fernandez, 2006. "Emerging Derivatives Markets: The Case of Chile," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 42(2), pages 63-92, April.
    • Handle: RePEc:mes:emfitr:v:42:y:2006:i:2:p:63-92
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    Citations

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    Cited by:

    1. Luis Opazo & Claudio Raddatz & Sergio L. Schmukler, 2015. "Institutional Investors and Long-Term Investment: Evidence from Chile," The World Bank Economic Review, World Bank, vol. 29(3), pages 479-522.
    2. Somaiyah Alalmai, 2023. "Derivatives Market: A Survey," International Journal of Economics and Financial Issues, Econjournals, vol. 13(6), pages 101-106, November.
    3. Atilgan, Yigit & Demirtas, K. Ozgur & Simsek, Koray D., 2016. "Derivative markets in emerging economies: A survey," International Review of Economics & Finance, Elsevier, vol. 42(C), pages 88-102.
    4. Evsey Gurvich & Vladimir Sokolov & Alexey Ulyukaev, 2009. "Analysis of the Relationship Between the Exchange Rate Policy of the Russian Central Bank and the Interest Rates: Uncovered and Covered Parity," Journal of the New Economic Association, New Economic Association, issue 1-2, pages 104-126.

    More about this item

    Keywords

    derivatives; hedging; liquidity;
    All these keywords.

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