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35-54). Scheerer (2001) Advises That The Real Test For Credit Derivatives ...

35-54). Scheerer (2001) advises that the real test for credit derivatives occurred during the Asian financial crisis in 1997. He states that credit derivatives performed more efficiently in that crisis than did the bond market. Scheerer (2001) points out that credit derivatives permitted investors the recovery of around $800 million from the Korean Development Bank along with the Industrial Finance Corporation of Thailand... he also points to the turmoil in the Russian financial markets as another example whereby credit derivatives had to face another even more intense stress test (Scheerer, 2001). In that instance credit derivatives were brought as insurance against devaluation of the Ruble and Russian government default.
The foregoing represents some examples of the problems encountered in emerging markets that derivatives aided in either solving problems, or forestalling an economic, and financial meltdown. Derivatives in the emerging markets financial crisis have allowed these markets time to shore up various policies as well as avoid a complete stoppages of investor confidence, even though they were subject to ‘sudden stops' as indicated by Calvo (1998, pp. 35-54). During, and since that time most of the emerging markets have taken as well as implemented added measures that have been, and are designed to ‘self insure' against the potential of volatile asset prices, and capital flows (Feldstein, 1999). The foregoing ‘self insure' measures consist of the following broad categories (Feldstein, 1999) and (Hyeon-Jin, 2002):
changes in the liability as well as external asset management practices,
the adoption of arrangements for exchange rates to match the degree of openness in capital account transactions,
a strengthening of financial institutions on a domestic level, along with the enhancement of regulation, and supervision to increase the resistance to volatility, and,
the development of local derivative, and securities markets as a measure to provide for alternative sources of funding in the corporate and public sectors as well as the facilitation in the management of financial risks that are associated with high asset price volatility periods
After the Asian crisis in 1997, it was suggested emerging markets should increase international reserve holdings as a provision representing ‘self insurance' against capital flow reversals (Feldstein, 1999). The development of local derivatives markets has been a large part of the foregoing as a result of it being a vehicle for the management of financial risks, particularly related to exchange and interest rates (Fischer, 2001, pp. 3.24).


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