Emerging Market Derivative Risk

There are several ways to value an option, but as many investors in emerging markets are finding out, valuing the options is a tough excercise when you have a distinct lack of trading history.

An option is the right to buy or sell an asset for a specific price, at a (usually) specific date in time.

Because of this, it's usually a good idea to have a rough understanding of the trading history of the asset you are buying or selling. The problem for emerging market investors is that there is comparatively very little in the way of trading history to go by.

Recently, we've seen an up-tick in volumes of emerging market derivatives, as I have outlined before. This bodes somewhat dangerously for investors in the underlying asset - i.e. company's share - because when these derivative traders decide they've had enough, there is prcatically no trading history to normalize the market in securities.

In other words, derivatives in emerging markets could well be the eventual downfall of this market.