Abstract:

As an innovative financial derivative, the structured derivative contract developed on the basis of the Brady Bonds. Actually it is a total revenue swap contract, though it appears to be an investment grade bond. Therefore, it has a function called "credit enhancement", and is highly risky. When the structured derivative contract enters into emerging markets, the banks in developed countries are often reluctant to handle risks, the investors have no means to handle risks, the banks in emerging markets which transfer loans to domestic enterprises do not handle risks at all, and finally the existing regulation and supervision authorities are not capable to handle risks. All these will cause the collective irrationality in international capital flows to emerging markets and worsen financial crises.

Key words: structured derivative contract, emerging market, international capital flow, collective irrationality