Hedging Emerging Market Bonds and the Rise of the Credit Default Swap

Abstract:     
On October 5, 2001, when credit spreads were widening, the Chicago Mercantile Exchange CME de-listed the full menu of emerging market Brady bond futures contracts. This is intriguing because at a time when interest in hedging and speculating in emerging market sovereign credit risk should be at its peak, the CME de-listed precisely the sort of contract designed to hedge and speculate in sovereign credit risk. This paper finds statistical evidence suggesting that the developing over the counter CDS contract acted as a substitute product for the Brady bond futures contract thereby undermining the Brady bond futures contract and contributing to its demise.

Number of Pages in PDF File: 30

Keywords: Emerging market bonds, Credit default swap, Brady bonds, Futures contracts, Hedging

JEL Classification: G13, G15, G24

Accepted Paper Series