The usage of derivative instruments Essay Example | Topics and Well Written Essays - 3000 words

The usage of derivative instruments - Essay Example The paper tells that in the present day context, the degree of competition was observed to be witnessing a significant rise along with the environment of business undergoing a constant alteration. The constant alterations have been giving rise to unforeseen situations that calls for effectual management with respect to the companies as well as banks. Therefore, it can be inferred that in relation to the mentioned context, it becomes important for the business enterprises to effectually manage the unforeseen risks from beforehand. It was identified in this regard that the most widely used financing strategies to overcome the challenges raised by business risks are the use of financial derivatives. Examples of financial derivatives used in the current risk management strategies are options and futures, and forward contracts. Options are defined as â€Å"the right and not the obligation to buy or sell something on a specified date at a specified price†. On the similar context, fu tures and forward contracts are also considered as significant risk management tools that are based on the value of fundamental assets. However, these techniques are subject to various factors such as credit rates, interest rates, currency fluctuations and other financial aspects which should be taken into consideration prior to the execution of this strategy. A derivative has been defined as an agreement that is found to take place among a buyer as well as a seller and gets initiated on the current date with regard to a particular transaction that is expected to be realised on a future date or time. For example, the tr