This website uses cookies to ensure you have the best experience. Learn more

Financial Institutions Essay

4021 words - 17 pages

DEVELOPMENT OF DERIVATIVE MARKETS IN EMERGING MARKET COUNTRIES1 A. Background Derivatives are commonly used for managing various risk exposures, including foreign exchange, interest rate, and credit risks. By allowing investors to unbundle and transfer these risks, derivatives contribute to a more efficient allocation of capital, in many cases reduce market and portfolio volatility, facilitate cross-border capital flows, and create more opportunities for portfolio diversification. Despite rapid growth over the past several years, Emerging Market (EM) derivatives account for only about 10 percent of the total outstanding notional values in global derivatives markets. Compared to mature ...view middle of the document...

Exchange-based trading of interest rate derivatives is particularly prominent in Latin American countries (mainly Brazil and Mexico) while most of the global EM derivative trading occurs in Asia’s over-the-counter (OTC) markets (mainly Hong Kong, Korea and Singapore). At the same time, some countries in Emerging Asia record spectacular growth rates of exchange-traded equity derivative products. Equity option trading in Korea accounted for 45 and 38 percent of all EM and global exchange-based trading, respectively. Further details are provided in the Annex.

1 2

Prepared by Capital Market Development and Financial Infrastructure Division, MCM, IMF. See Global Financial Stability Report (2004).

-2Figure 1. Global Trading Volume of Exchange- and Over-the-counter (OTC) Traded Derivative Contracts (Daily averages, notional amount in billions of US dollars) ( y g )
200,000 180,000 160,000 140,000 120,000

2

2001/2002
100,000 80,000 60,000 40,000 20,000 0
LatAm EM Asia CEE/ME/ZAR LatAm EM Asia CEE/ME/ZAR LatAm EM Asia CEE/ME/ZAR

1

2004/2005

Equity Options and Futures

Interest Rate Swaps, FRAs and Options

FX Forwards and Swaps

Sources: BIS, country exchanges, ISDA, WFE, staff estimates. 1/ OTC data was obtained for the years 2001 and 2004, while data on exchange-based trading stems from annual trading activity in 2002 and 2005.

Table 1. Summary Overview of Exchange- and Over-the-counter (OTC) Trading Volume of Derivative Contracts (Daily averages, notional amount in billions of US dollars) Commodity1 98.3
Europe/Africa (99.0%)

FX EM
Top EM Region

Interest rate 56.7

Equity

10.2
Latin America (94.7%)

Exchange-traded 170.1
Asia (98.0%)

Latin America (73.2%)

MM EM
Top EM Region

41.3 218.5
Asia (84.5%)

3,705.0 30.3
Asia (76.7%)

287.7.6 OTC -

20.1 n.a. n.a.

MM

1,539.4

1,300.8

Source: BIS Triennial Central Bank Survey (April 2004), 1/incomplete data.

-3C. Challenges and Policy Implications The state of development of the underlying asset market

3

Well-functioning derivative markets are generally associated with active and generally liquid underlying cash markets. The development of derivative markets in EM is hampered by problems of low liquidity levels in bond and equity markets. Limited trading activity may in turn reflect information asymmetries due to insufficient disclosure standards, lack of transparency and corporate governance related issues as well as limited participation due to entry restrictions or other distortions, including macroeconomic distortions. Liquidity in cash and derivative markets can be mutually reinforcing but at times the lack of liquidity in underlying cash markets may hamper development of derivative markets. The availability of reliable pricing benchmarks across the whole term structure helps to avoid concentration of trading at certain maturities (usually short-term), such as the case in India and Mexico. In Korea, only the...

Other Papers Like Financial Institutions

The Federal Reserve Essay

1021 words - 5 pages monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices. * Supervising and regulating banks and other important financial institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers. * Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets

Financial Markets Essay

1669 words - 7 pages paper in it’s entirely, considers the lessons that the emerging financial markets from the developed and the developing can learn from the developed financial institutions. However, the basis of the paper is on U.S, England, Japan and then Germany. Introduction Traditional studies of the above mentioned four countries have continued to place some emphasis on the explanations concerning acceleration of the growth that have continued to occur within

Financial Intermediation

3340 words - 14 pages exceeds their current expenditure. Financial Intermediation is thus a process which involves surplus units depositing funds with financial institutions who then lend to deficit units. The main functions of financial intermediaries are; a) The brokerage function: where financial intermediaries act as transactors by providing transaction and other services. As a result the reduce transaction costs and information costs. b) The asset

Moral Hazard

1014 words - 5 pages economy was faced with trouble when housing prices dropped. Homeowners had questionable credit but banks were reselling them in mortgage-backed securities. The Federal Reserve was under the impression that this issue was confined to the housing market. Unfortunately, financial institutions owned them in the form of mutual funds, corporate assets, and pension funds. These purchases of assets were very risky; this is where moral hazard comes into play

Hedge Funds

2410 words - 10 pages MANAGEMENT FINANCIALLY? 5 WHAT WERE THE ARGUMENTS IN FAVOUR AND AGAINST THE RESCUE OF LONG-TERM CAPITAL MANAGEMENT? 6 Arguments for the rescue of LTCM: 6 Arguments against the rescue of LTCM: 6 WHAT TYPE OF FINANCIAL INVESTOR WAS DIRECTLY AFFECTED? WHAT WAS THE POTENTIAL INDIRECT EFFECT OF THIS CATEGORY INVESTOR FAILURE? 7 DOES THE RESCUE OF INSTITUTIONS LABELLED “TOO BIG TO FAIL” 9 Strengthen the long term stability of financial services

Zopa

1678 words - 7 pages money" which contrasts to the traditional banking model [Zopa Website]. In this essay I plan to discuss the uniqueness of Zopa and their business model in relation to existing financial institutions. Following this I will analyse Zopa's competitive advantage and then discuss Zopa's main competitors and how they could create barriers to entry for late entrants. 1) Begin your essay by discussing how Zopa is different from existing financial

Mike

595 words - 3 pages ' locations. Most financial institutions offer an array of services, so agents need to be knowledgeable of what their institution has to offer and how these services may benefit their customers. Financial services agents may be required to have a bachelor's degree in finance, accounting or business, depending on the institution. Many employers prefer agents who have experience working with the public and who have good customer service skills

Accounting

374 words - 2 pages institutions to give the US Internal Revenue Service information about financial accounts held by US taxpayers. Foreign financial institutions will be required to enter into a disclosure agreement with the US tax authorities to report on its US accounts if a foreign institution does not enter into an agreement with the IRS or comply with FATCA, all relevant US sourced payments, such as dividend and interest paid by US corporations, will be subject to a 30

Global Recession

1280 words - 6 pages booming years helped the banks to create easy credit conditions for many years. Banks lent money on the assumption that housing prices would continue to rise. Also the real estate bubble encouraged the demand for houses as financial assets. Banks and financial institutions later repackaged these debts with other high-risk debts and sold them to world- wide investors creating financial instruments called CDOs or Collateralized Debt Obligations

Ethics

999 words - 4 pages businesses experience uncommon types of challenges. All existing medical institutions should function in respect to the four elements of financial management. Two items included are Scam and Punishment that everybody ought to know as it pertains to being straightforward and doing what is ethically correct to all or any the events right involved. By these normal accepted accounting maxims, the business could be useful and undoubtedly compliant. Ethical

What Is Financial Market? Discuss The Components Of Financial Market?

1323 words - 6 pages A financial market is a market in which people and entities can trade financial securities, commodities, and other fungible items of value at low transaction costs and at prices that reflect supply and demand. Securities include stocks and bonds, and commodities include precious metals or agricultural goods. The definition may be termed as: "Financial Markets are generally known as a market where financial securities or/and assets are bought

Related Essays

Proposal Essay

1691 words - 7 pages Background Financial institutions are great motivator in ensuring money navigation to the needy from the person who have plethora of that, especially for the countries of the third world alike the developed nations (Harker & Zenios, 2008). In developing economy and overall money system their contributions are of no denying. Financial institutions in the Asia pacific region are doing exactly the same. Financial institutions like large retail

United States Global Financial Crisis Essay

999 words - 4 pages a period of high volatility, and a considerable number of banks, mortgage lenders and insurance companies failed in the following weeks. Scope The crisis in real estate, banking and credit in the United States had a global reach, affecting a wide range of financial and economic activities and institutions, including the: Overall tightening of credit with financial institutions making both corporate and consumer credit harder to get

A Review Of “The Financial Crisis...” By John B. Taylor

454 words - 2 pages crisis worse. He shows how the ad hoc support for financial institutions such as Bear Stearns, Lehman Brothers, and AIG created uncertainty. By rescuing some institutions and not others without particular or stated reasons, it lead to an increase in the counter-party risk mentioned above. This created added uncertainty in the market which made business and investment decisions very difficult. In conclusion, Taylor shows that the federal

Essay

293 words - 2 pages given situation. • Rules and principles (ethical theories). itness debates about public ownership of financial institutions, the arrival of sovereign wealth funds, regulation of the banks, the big society, and the prospect of massive public expenditure cuts. These concerns have pre-occupied employees, shareholders, mortgage-holders, taxpayers and policymakers. Viewpoints over responsibility, retrospectively and prospectively, appear confused