Latin American Capital Markets

•CHAPTER 11Designing a Derivatives Complementto Cash Markets in Developing CountriesAndrea M. CorcoranRonald B. HobsonGregory J. KuserkKaren K.WuertzDerek WestFutures markets are centuries old. The value of forward pricing for reducing pricerisks to producers and consumers was recognized in Holland in the 1600s and inJapan in the 18th century. Over-the-counter (OTC) derivatives in the United Statesdate from cotton-linked bonds issued during the Civil War For at least the past 150years, futures contracts on agricultural commodities have permitted participants inagricultural markets in the United States to reduce their exposure to price changesby establishing positions in the futures markets opposite their cash market positionsor obligations. Futures and exchange-traded options contracts on metals, financial instruments(stocks, bonds, and foreign currencies), and energy products were developedfollowing rate deregulation in the respective underlying markets. Experiencedemonstrated that, if properly managed, such deregulation provided the same opportunitiesto financial institutions and corporations facing uncertain price exposurein these markets to use futures and options for risk management, as had the formermarkets for agricultural and physical commodities. Similar deregulatory developmentsoutside the United States also led to demand for effective risk management markets.The Futures Industry Association's (2001) statistics on volume of trading show thatmost non-U.S. derivatives markets have developed since the mid-1980s, with substantialgrowth in the 1990s (see table I I -1). In the late 1980s and 1990s, almostevery mature market added a financial derivatives market on sovereign debt and thelocal stock index.This fact has led policymakers interested in developing and enhancingcapital markets to explore whether and how they should treat derivatives whenCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub