Question

Can you explain what's the difference in risk with Emerging Market bonds denominated in local currency...

Can you explain what's the difference in risk with Emerging Market bonds denominated in local currency and Emerging Market bonds denominated in counterparty (Please explain it in a simplefied way since I don't understand the meaning of Emerging Market)

Homework Answers

Answer #1

Risks in emerging market bonds in local currency:

The following are the various risks associated with market bonds in local currency:

  • There are chances that emerging market could suffer from political instability & there can also be slow evolution to democracy.
  • There can be hot money trade.
  • There are also chances that some emerging markets depend on commodity markets.
  • There are less true real yield opportunities.

Risks in emerging markets with counterparty risk:

There can be emerging market sovereign credit risk in case of counterparty currency. The main risk that is inherent with counterparty currency bonds is the foreign exchange risk. This is because when we get returns in the other country currency, there can be loss of returns when we convert from that currency to our local country currency.

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