| The Mexican meltdown in December 1994 was a major disaster for foreign companies and fund managers with investments in the country, and a strong reminder of the investment risks of emerging markets. But increased risk awareness, paradoxically, did not help the nascent derivatives market that had been flourishing in Mexico for a few years before the peso devaluation. Rather, it went backwards, dragging down the derivatives markets of other emerging markets in the process. In the aftermath of the devaluation, panicky investors fled to safer havens as volatility increased and liquidity dried up in the underlying stocks of these markets. In the year and a half since then, improved fundamentals in Mexico and the other emerging markets have lured them back. Not only is there is a renewal of interest in the equity and fixed-income instruments in these markets, derivatives are also making a comeback. Having learnt from the havoc that derivatives caused - not only in Mexico but in more developed markets - investors are now considerably wiser and more cautious, and it has become much harder for margin-hungry banks to make their pitch to sell these profitable products. From Chile to Singapore, 90% of derivatives markets are still in the hands of banks which structure products for their clients. |