Explain the difficulties of managing currency exposure in emerging markets

Emerging market currencies cost more to trade, with wider bid–ask spreads and liquidity that can vanish in stress, just when hedges are needed. Returns are fat-tailed and negatively skewed: long spells of steady carry income broken by sudden devaluations, often when a peg breaks or a government intervenes. Correlations across these currencies jump in a crisis, so diversification fails as contagion spreads. Capital controls often block delivery, so hedges use non-deliverable forwards settled in cash in a convertible currency, bringing basis risk against the onshore rate and exposure to rule changes. Risk models built on normal distributions and calm-period data therefore understate losses, so managers should stress-test, size positions conservatively and expect hedging costs to rise in turmoil.