Derivatives Imp Limit

8/8/2019 Derivatives Imp Limit

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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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Derivatives Imp Limit

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