Widespread use of derivatives is a recent phenomenon and it is no surprise, therefore, that the use of derivatives in emerging markets is still evolving. The literature on the availability, use and trading of derivatives by emerging economies shows an interesting pattern. Prior to the global financial crisis, the literature is enthusiastic about the introduction of derivatives (for example, see quotation above).

However, much caution enters into the debate post-2008. While the relative underdevelopment of financial markets in developing countries is generally considered a handicap, in respect of derivatives it may have some advantages. Insofar as the global financial crisis of 2008 enables emerging markets to learn from, and avoid, the mistakes that developed countries made and improve their regulatory framework, the crisis should be deemed a blessing in disguise for them.

This chapter looks at the role of derivatives in emerging markets. In this chapter, the term ‘emerging markets’ is usually used in the generally recognized sense of a subset of countries that are relatively advanced among the wider group of developing countries, but is sometimes (when the context requires) used to connote that wider universe.

Derivatives in emerging economies, used by emerging economies and on emerging economies

Derivatives impinge on emerging market economies in several ways. Firstly, there are those countries which have built their own derivatives markets, both exchange-traded and OTC. Here, the interesting issues relate to the wider economic impact of, and regulatory framework for, these markets.

Secondly, economic entities in developing countries and emerging economies make use of derivatives markets; these markets need not necessarily be situated in emerging economies.