THE AMOUNT OF DERIVATIVES purchased by banks in the country rose sharply in last year, when the perceived volatility of interest and exchange rates prompted them to buy securities meant to protect their assets against adverse price movements.

Data from the Bangko Sentral ng Pilipinas revealed that value of derivatives held by banks reached P2.999 trillion as of end-2009, up by about 65 percent from P1.813 trillion the previous year.

?The substantial year-on-year increase took place as banks with ample capital buffer became more comfortable to take on additional risks from these types of instruments in the midst [the] volatilities,? the BSP said in a report.

The BSP said bulk?or 82 percent?of the amount of derivatives purchased by banks were accounted for by foreign exchange contracts, mostly in the form of forward contracts.

Foreign exchange forwards are agreements to purchase or sell an amount of foreign currency at a future date at a predetermined price.

The balance was accounted for by interest rate contracts, mostly in the form of interest rate swaps, which are hedging instruments against volatility of interest rates.

The foreign exchange and interest rate environments last year were volatile, especially during the peak of the global economic turmoil.

The crisis across the globe, driven by economic recessions in industrialized nations, encouraged even local banks, which escaped a contraction, to protect their resources.

The BSP said, nonetheless, that the peso was actually less volatile compared to other currencies. In an earlier report, the central bank said the peso exhibited the least amount of volatility among selected key Asian currencies last year, having an average volatility rate of only 1.51 percent.

The peso was the second-least volatile following the dollar-pegged Chinese yuan, volatility of which stood at 0.08 percent, among 13 major Asian currencies.

The BSP added that interest rates, which have been erratic offshore, have been more stable domestically.

The central bank likewise said the country?s banking sector remained profitable last year, even if its counterparts in the West suffered from liquidity woes.