Although the world currency markets are in an agitated state, the options for hedging in emerging markets and for Latin America in particular remain limited. Hedging in emerging markets is usually deemed too expensive to be worthwhile.

Haijo Dijkstra, managing director of Amsterdam-based currency manager Rabo Olsen, says none of his clients have asked for Latin America hedging.

One of the main reasons to be in emerging markets is to run the risk for a higher return so why hedge part of it. Either you are in or you should not enter into the market at all because illiquidity is still a key part of those markets," he adds.

Wil Gaitan, director of international consulting services with Buck Consultants in New York, has seen no demand either. "From the European point of view, most of those countries do not allow investments in foreign currency except to the extent that they are available inside the country. Any hedging done is to hedge against inflation in their own country.

Ulf Lindahl, chief investment officer of Connecticut-based currency manager AG Bisset, says there are three basic views of Latin American currency risks.

These are that the risks are too great to enter, to be present and to hedge where possible or to be present but be prepared to leave in the event of a crisis. "The third approach is to say 'yes we invest but when the currency comes under serious pressure we will sell our holdings and go home', the one most people take in reality."

The company offers currency management in Asia and believes its strategies have proved effective in recent months but it does not offer solutions for Latin America.

In Argentina, the peso is dollar-pegged and uses a currency board. "Hedging costs too much unless one is sure that the peg will break because rates are very high. The other currencies will either slide or devalue significantly from time to time. High interest rates make the cost of hedging higher than the protection given."

The one currency which can be hedged is the Mexican peso which can be traded on the Chicago futures exchange. However Lindahl is not sure that this would prove cost-effective for investors unless they believe that a fairly steep fall is going to occur.

Dijkstra believes significant currency management in the region is still far off."

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