DERIVATIVES are not the prerogatives of the Western economies, and Asian economies are now picking up in the volume of its usage and the level of sophistication. Though no statistics are available, intensive education and marketing programmes have been stepped up by foreign banks on Asian companies with a view to grabbing a share of this fledgling market. As most Asian companies are export-oriented, focusing on intra-regional trade and trade to the United States and Europe, they are prone to risk. ''A typical profile of an Asian manufacturing company is that it imports from Japan and sells its goods to Europe, such as Germany. So it is 'short yen and long deutschemark'. Its need is no different from a dealer in a bank,'' said Ralph Liu Yiehmin, of Chase Manhattan Asia's Asia-Pacific financial institution. With the persistent strengthening of yen recently, companies could easily see profits disappear because of unfavourable currency swings, he said. The increasing scale of these Asian manufacturing companies, the blossoming intra-regional and inter-regional trade and the ongoing financial deregulation are factors promoting the growth of derivatives, or in simple terms, risk management instruments. ''To catch up with the manufacturing success in Asia, there must be a corresponding development in financial capability to match that,'' he said. Even governments in Asia have a large proportion of their foreign debt in yen and other foreign currencies. Most Asian companies show concern over currency risk as the region is made up of a large number of small economies which trade actively within the region and outside. Yet there are countries whose interest rate exposure cannot be lightly brushed aside. Financial companies in Thailand, which used to borrow heavily in US dollars when the interest rate was low, to finance domestic projects in Thai baht at much higher rates has creamed an alluring profit just from the rate differentials. ''Now that the US interest rate has gone up, the differential suddenly evaporates,'' Mr Liu said, adding that if the institutions had hedged their US dollar liability through derivatives, the cost of borrowing would not go up. Interest rate risk is particularly acute in countries such as Thailand, the Philippines and Malaysia where long-term debt borrowing is the common way of fund-raising. To countries such as Taiwan and South Korea, where projects are mainly financed by short-term bank borrowings, their interest rate exposure is comparatively low. In the US, where the economy is of sufficient size to enable companies to solely rely on the domestic demand, currency-related derivatives are relatively weakly developed than interest rate ones. However, in Europe, where numerous economies trade with one another, it is a natural breeding ground for more sophisticated and innovative currency derivatives. At present, Hong Kong and Singapore, where most foreign banks base their regional headquarters, are the two providers of risk management skills in Asia.
