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Finance and Accounting - Essay Example
Author : corkerymiguel
Finance & Accounting
Pages 4 (1004 words)
It is evident from the definition that they redistribute and reallocate the risk generated in the economy.In such circumstances derivatives are the perfect instrument to transfer risk, which can utilized either for hedging risk or obtaining risk…
A survey conducted by International Swaps and Derivatives Association (ISDA) revealed that out of 500 corporations, around 94% of the companies used derivative tool and they efficiently succeeded in hedging risks (International Derivatives and Swaps Association, 2009). It is seemingly clear that derivatives have economic and financial benefits for business which means they have resulted in making global financial markets safer. However, with the emergence of derivatives for financial speculations has brought this instrument under heavy criticism for making financial sector more risky and has been criticised for financial crisis. So, derivative have some benefits and risks too. The first most advantage of derivatives is the restructuring of risks by which movement in assets prices, interest rates and default of creditor can be hedged. They help in speculating the movement in the value of assets when they do not even own the assets. Secondly derivatives allows businesses to accomplish in controlling the external factors efficiently. Derivative instrument has been criticised for being used only for speculations. Derivatives contracts reduce the risk of one party while increases risk of the underlying assets for other party; this allows both parties to speculate the value of the principal assets irrespective of the fact parties are interested in the contract or not. ...