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Financial services ( Derivatives )
Finance & Accounting
Pages 7 (1757 words)
Finance and Accounting Financial Services (Derivatives) Table of Contents Table of Contents 2 Inroduction 2 Bank and Companies Exposed to Losses 3 Risk of Derivative Contracts 4 Counterparty Credit Risk 4 Transparency Risk 5 Legal Risk 5 Credit Risk 5 Market Risk 6 Basis Risk 6 Benefits of Derivative Contracts 6 Conclusion 8 Reference 9 Inroduction A derivative contract is referred as a bilateral agreement which grants for payment to be made by one contracting party to the other.
In United Kingdom, derivatives can be traded by two methods: either through an over-the-counter (OTC) or organised exchange. The exchange traded derivatives market is controlled by Chicago Mercantile Exchange and Euronext.LIFFE that is based in London. Exchange traded derivatives are always bought and sold in an exchange setting that is totally regulated and transparent. On the other hand, OTC exchanges takes place when trader prefer to trade directly with each other. Between both types of trade, there are two main differences: Firstly, exchange traded contracts increases liquidity. Secondly, traders enter into a contract through the exchange clearing house which gives them a guarantee that the contract will be adhered to. Over-the-counter trade do not have that lavishness because there is always the risk that one of the contractors will fail to honour the original agreement thereby going into liquidation (Reid, 2013, p.1). This paper will focus on the list of bank and companies making losses from using derivatives and what are the risks and benefits of different types of derivatives contracts. Bank and Companies Exposed to Losses There are some banks and companies which are exposed to losses due to derivative contracts. ...
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