Currency Derivatives and Emerging Market Currencies: Strategies, Perspectives, and Trends

Emerging markets have delivered significant double-digit returns to foreign investors for more than a decade, clearly outpacing the returns from developed markets. The gains, however, have come with a price: high risk. In particular, political instability and erratic macroeconomic policies have caused wide swings in local currencies. Although these swings have mitigated in recent years, it behooves foreign investors to use currency derivatives to limit their impact. This article provides an overview of currency derivatives and strategies to hedge currency risk in emerging markets, including developments in currency derivatives in selected emerging economies in Asia, Africa, Europe, and Latin America.