Impact of Derivatives on Volatility of Capital Flows and Policy Implications

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3.1. This project would aim to establish how large are the hedging activities of foreign direct investors, what their timing is, and to what extent these hedging activities contributed either to large exchange rate depreciations, or even to currency crises. This is an issue that has important and new policy implications for governments and Central Banks in the region. The policy implications that the project would evaluate and suggest would relate to the development and possible regulation of derivatives markets, and to policies towards hedging activities by foreign direct investors, especially those selling in the domestic markets.