Transcript
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SANTOsH BALCHANDRAN B-02MANISHA JAIN B-18SUPRIYA SALGAONKAR B-43
Importance
and
limitations of Derivatives
By
Group-05
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Derivatives are nothing but a kind of security whose price or
value is determined by the value of the underlying variables.
It is more like a contract of future date in which two or more
parties are involved to alleviate future risk. Usually,
derivatives enjoy high leverage. Its value is affected by the
volatility in the rates of the underlying asset
Derivatives
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Underlying Assets
Indexes
(consumer price index (CPI), stock market index,
weather conditions or inflation)
BondsCurrencies
Interest rates
Exchange rates
CommoditiesStocks (equities)
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Types of Derivatives
Forwards
Futures
Options
Swaps
I. Interest rate swaps
II. Currency
swaps
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IMPORTANCE OF DERIVATIVES
Derivatives facilitate the buying and selling of risk
Provide leverage or gearing
Speculate and to make a profit
Hedge or mitigate risk in the underlying
Obtain exposure to underlying
Create option ability where the value of the derivative islinked to a specific condition or event
Softens the impact of the economic downturn
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MYTHS ABOUT
FINANCIAL DERIVATIVES
Derivatives are new, complex, high-tech financial products created by
Wall Street's rocket scientists.
Derivatives are purely speculative, highly leveraged instruments.
The enormous size of the financial derivatives market dwarfs bank
capital, thereby making derivatives trading an unsafe and unsound
banking practice.
Only large multinational corporations and large banks have a purpose
for using derivatives.
Financial derivatives are simply the latest risk-management fad.
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Derivatives take money out of productive processes and never put
anything back.
Only risk-seeking organizations should use derivatives.
The risks associated with financial derivatives are new and unknown.
Derivatives link market participants more tightly together, thereby
increasing systemic risks.
Because of the risks associated with derivatives, banking regulators
should ban their use by any institution covered by federal depositinsurance.
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Possible large losses
Counter-party risk Large notional value
Leverage of an economy's debt
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CONCLUSION
Derivatives are powerful instruments with a high degree
of leverage, thus large gains or losses can result fromsmall price changes Thus an effective use demands thefollowing:
Having the requisite knowledge of its
structure and applicability
The reason for using it should be properly
understood; there could be a high appeal to use it for speculation
instead of for hedging, and this could be very dangerous.
The appropriate type of derivative should be
selected for different situations
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