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Video FX Derivatives in Emerging Markets: Chilean Hedges and the Crisis | Numerix Video Blog (Hedging of forex)

M Compared to other emerging market economies, Chile fared better than many of its peers during the 2008 crisis. FX expert Udi Sela.

Jim Jockle (Host): A highlight has come out for derivatives usage in the Bank of International
Settlements Report, as it relates to the use of FX hedges by the Chile to weather the storm
through the Lehman Crisis, with me today, Udi Sela of Numerix, how are you Udi?
Udi Sela (Guest): Thank you, nice being here Jim. Thank you.
Jockle: Udi walk us through elements of the report. What was Chile doing in terms of hedging
to recent market exposures?
Sela: Okay so let’s just be accurate, this is not really the Chilean Government, we’re
talking here about the Chilean Banks, and the idea was unlike previous events occurring
in emerging markets, the Chilean Corporates were hedged against FX exposure, so when the
local currency was devalued, the local corporates did not take major hits, as oppose to crisis
that we saw in similar cases in Korea, India, Brazil, and Mexico and so forth. This is basically
what bis.org wanted to highlight.
Jockle: And one of the elements that it highlighted was also that it went beyond just base level
hedging and it was almost over hedging in many different ways. What kind of strategies
do you think were being employed at that point and time.
Sela: Well I would suspect that first of all these were mostly buy-only strategies, or
strategies that involve banks sell but when the sell is in the right direction, in the
sense that if the local country strengthens, than it is good for the

exporters.
Jockle: And looking ahead, what do you expect in terms of changes in the regulatory environment
and the way that some emerging market banks are going to be looking at FX derivatives?
Sela: So in general I would say that still central banks would be cautious because of
the misuse of exotic options in a way that was not really beneficial for corporates,
so without really understanding what the risks associated with those trades were, I do think
that central banks and governments would encourage putting good risk practices in place and usage
of derivatives in a more beneficially intelligent way. I don’t think they will discourage
people from using, but I think the requirement would be understanding what you do, because
this was the main concern over the various crisis’ that we have crossed in the last
few years.
Jockle: Udi thank you and the publication is available on the bis.org website, in terms
of the case study it was part of the Quarterly Review. Udi thank you so much for joining
us today and giving a little bit more color and insight on this recent publication.
Sela: Thank you my pleasure.
Jockle: And again, please feel free to follow Udi on LinkedIn, or join the conversation
on twitter @nxanalytics or on our blog. Your feedback keeps us going. Thank you and have
a great day.
Sela: Thank you.

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