The Economics of Derivatives

Somanathan, T. V.; Nageswaran, V. Anantha

doi:10.1017/cbo9781316134566

Cited by 5 publications

(5 citation statements)

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“…This type of trading is characteristic of the exchange in that it collects margin from participants and is responsible for clearing and guaranteeing performance. The contractual structure of OTC trading is less flexible and more regulated than that of OCT trading, and new contract types designed by market participants on exchanges are usually evaluated by regulators, which is not only time-consuming but also costly [3].…”

Section: Form Of Tradingmentioning

confidence: 99%

Financial Derivatives: Application and Risk Management

Xiang¹

2022

Advances in Economics, Business and Management Research

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While financial derivatives are a necessary hedge in today's financial markets, they also carry substantial risks. There has been a steady stream of cases of significant losses incurred by companies investing in derivative financial instruments around the world. The highly leveraged nature of derivatives has created a crisis in the financial system. This paper uses a combination of theoretical analysis and case analysis, starting with introducing the origins of derivatives, the principles of trading and the explicit and potential risks that may be encountered. Then, two specific corporate case studies are presented to demonstrate the improper usage of financial derivatives and the crisis that might result from an ineffective risk management strategy. Finally, recommendations for risk management and derivatives regulation systems are presented. It is hoped that the research in this paper will lead to a better understanding of the importance of strengthening regulation and risk-aversion awareness in the financial derivatives market. In addition, provide existing companies with a new approach to derivatives risk management to help the financial derivatives market achieve steady growth.

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Section: Form Of Tradingmentioning

confidence: 99%

Financial Derivatives: Application and Risk Management

Xiang¹

2022

Advances in Economics, Business and Management Research

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“…However, the complex design of exchange-traded contracts makes the valuation extremely complex, thus making exchange-traded derivatives have high inherent risk [5]. OTC transactions can allow small companies to trade without being required to go public.…”

Section: Derivative Instrumentsmentioning

confidence: 99%

Financial Derivatives and Their Application in Enterprises

Huang¹,

Yao²

2021

Proceedings of the 2021 3rd International Conference on Economic Management and Cultural Industry (ICEMCI 2021)

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With the opening of the financial market, the financial derivatives market has also encountered greater development opportunities. However, opportunities and challenges always coexist, so enterprises must use financial derivatives reasonably and correctly. This paper adopts the method of combining theoretical analysis with case analysis to introduce the types, risks, applicable mechanisms and typical application cases of financial derivatives in detail. In addition, through detailed descriptions of the theoretical underpinning, the reader could learn about the trading processes and profitability mechanisms of several major derivatives, as well as conducting immersive simulations through case studies. Through in-depth analysis and research, it is concluded that enterprises should actively invest in technology and resource support, use derivatives to control risks and realize enterprise value. Hedging, rather than random speculation, should be the first rule of thumb for companies using derivatives. It is hoped that the research of this paper can provide a good way for existing enterprises to use derivatives to avoid risks and help the financial derivatives market achieve steady development.

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“…The overall market environment was clearly one factor, where an extended period of low interest rates led to loose credit, use of extensive leverage, and an ongoing quest for higher yielding returns. In turn, risk taking increased and, in the US, a housing price bubble formed (Somanathan and Nageswaran, 2015). Increased global interconnectedness was also clearly a factor that led to cascading risk and ultimately led to a crisis of confidence.…”

Section: Issues and Risks With Over-the-counter Derivatives That Led To Financial Instabilitymentioning

confidence: 99%

Smart contracts: will Fintech be the catalyst for the next global financial crisis?

Duran

Griffin

2020

JFRC

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Purpose This paper aims to examine the risks associated with smart contracts, a disruptive financial technology (FinTech) innovation, and assesses how in the future they could threaten the integrity of the global financial system. Design/methodology/approach A qualitative approach is used to identify risk factors related to the use of new financial innovations, by examining how over-the-counter (OTC) derivatives contributed to the Global Financial Crisis (GFC) which occurred during 2007 and 2008. Based on this analysis, the potential for similar concerns with smart contracts are evaluated, drawing on the failure of The DAO on the Ethereum blockchain, which involved the loss of over $60m of digital currency. Findings Extensive use of bilateral agreements, complexity and lack of standardization, lack of transparency, misuse and speed of contagion were factors that contributed to the GFC that could also become material concerns for smart contract technology as its adoption grows. These concerns, combined with other contextual factors, such as the risk of defects in smart contracts and cyberattacks, could lead to potential destabilization of the broader financial system. Practical implications The paper’s findings provide insights to help make the design, management and monitoring of smart contract technology more robust. They also provide guidance for key stakeholders on proactive steps that can be taken with smart contract technology to avoid repeating the types of oversights that contributed to the GFC. Originality/value This paper draws attention to the risks associated with the adoption of disruptive FinTech. It also suggests steps that regulators and other key stakeholders can take to help mitigate those risks.

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The Economics of Derivatives

Cited by 5 publications

References 0 publications

Financial Derivatives: Application and Risk Management

Financial Derivatives: Application and Risk Management

Financial Derivatives and Their Application in Enterprises

Smart contracts: will Fintech be the catalyst for the next global financial crisis?

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