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Derivatives Market

In: Business and Management

Submitted By sanchitk
Words 16915
Pages 68
INTRODUCTION
The emergence of the market for derivative products, most notably forwards, futures and options, can be traced back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. By their very nature, the financial markets are marked by a very high degree of volatility. Through the use of derivative products, it is possible to partially or fully transfer price risks by locking-in asset prices. As instruments of risk management, these generally do not influence the fluctuations in the underlying asset prices. However, by locking in asset prices, derivative products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of riskaverse investors.
The main function of derivatives is that they allow users to meet the demand for costeffective protection against risks associated with movements in the prices of the underlying.
In other words, users of derivatives can hedge against fluctuations in exchange and interest rates, equity and commodity prices, as well as credit worthiness. Specifically, derivative transactions involve transferring those risks from entities less willing or able to manage them to those more willing or able to do so. Derivatives transactions are now common among a wide range of entities, including commercial banks, investment banks, central banks, fund mangers, insurance companies and other non-financial corporations.
Participants in derivatives markets are often classified as either “hedgers” or
“speculators”. Hedgers enter a derivative contract to protect against adverse changes in the values of their assets or liabilities. Specifically, hedgers enter a derivative transaction such that a fall in the value of their assets will be compensated by an increase in the value of the derivative contract. By…...

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