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Olatundun Janet Adelegan
This paper examines the role of the derivatives market in South Africa and provides policy options for promoting the development of derivatives markets in sub-Saharan Africa. South Africa's derivatives market has grown rapidly in recent years, supporting capital inflows and helping market participants to price, unbundle and transfer risk. There are tight regulations on asset allocations by insurance and pension funds to prevent excessive risk taking. The development of derivatives markets in sub-Saharan African countries could enable market participants to self-insure against volatile capital flows. Theiroverdependence on bank credit as a source of funding could be reduced and their management of seasonal risk could be improved through the introduction of commodity futures. However, these markets must be appropriately regulated and supervised. Since such markets would likely be small, consideration should be given to the establishment of a regional derivatives market.
International Monetary Fund
The paper documents institutional reforms that have taken place in the government debt markets of many industrial countries since the early 1980s, and investigates the impact of three key changes: (i) the move from relationship financing to market funding; (ii) the introduction of options; and (iii) the introduction of futures. Variance ratio tests on bond data for 14 industrial countries indicate that the move to market funding increased the volatility of bond yields and improved the informational efficiency of the secondary markets. The introduction of options and futures increased the informational efficiency of the underlying market, but did not have a stabilizing effect.
International Monetary Fund
This technical note provides an overview of Mexico’s derivatives markets, and describes concisely the derivatives regulatory framework and risk management practices in financial institutions active in these markets. The most important derivatives market in Mexico is the over-the-counter (OTC) derivatives market, which is fully integrated with the global derivatives market. The origin of the OTC derivatives market can be traced back to the 1994 Mexican crisis that forced Mexico to abandon its fixed exchange rate regime.
Mr. Noureddine Krichene
Option prices provide valuable information on market expectations. This paper attempts to extract market expectations, as conveyed by an implied risk-neutral probability distribution, from option prices for the dollar-euro exchange rate. Returns' volatilities are inferred from observed and interpolated option prices. To address robustness, two distributions, one from actual data and the other from interpolated data, were computed. The main conclusion of the paper is that traders have wide-ranging expectations, and large movements in either direction would not occur as a surprise. The main implication for monetary policy is that should markets become too volatile, then intervention may be required.
Mr. Noureddine Krichene
One approach to oil markets is to treat oil as an asset, besides its role as a commodity. Speculative and nonspeculative activity by investors in the derivatives markets could be responsible for a sizable increase in oil prices. This paper recognizes both the consumption and investment aspects of crude oil and proposes Levy processes for modeling uncertainty and options pricing. Calibration to crude oil futures' options shows high volatility of oil futures prices, fat-tailed, and right-skewed market expectations, implying a higher probability mass on crude oil prices remaining above the futures' level. These findings support the view that demand for futures contracts by investors could lead to excessively high price volatility.