Use of Derivatives in Risk Management - Research Paper Example

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Use of Derivatives in Risk Management

The global economic environment and the financial market have evolved drastically over the past decade. With the advent of information technology at a rapid pace, the financial markets of the world are now closely integrated. Due to this phenomenon of the world being a global village, a turbulence originated in a far distant financial market can have eventual consequences all across the globe. With the revolution in the communication technology, the access to information is instantaneous and thus the subsequent market reactions.
It is of prime importance to understand the concept that how does financial risk arises in order to safeguard’s one asset from deteriorating while being exposed to such risks. For any organization or a company, the financial risk arises by entering into a financial transaction such as sales, purchase, investing into securities and bonds, sanctioning of loan and advances, mergers and acquisition transactions, debt financing etc. Financial risk is directly co-related to the prevailing financial prices in the markets, as the fluctuation in these prices causes an increase in the cost to the companies, reduction in the revenues and thus adverse impact on the profitability of the company. These underlying financial prices can be anything ranging from the market interest rates, exchange rates and commodity prices. ...Show more

Summary

For any corporation risk management is of prime importance. In today’s dynamic global economy every company is looking for and devising ways through which it can curtail the element of risk in its operations and function smoothly without any hindrance…
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