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Introduction 4
Derivatives Market 5
Credit default swap 7
Financial risks 8
1. Foreign exchange risk 9
The example of Volkswagen 9
2. Interest rate risk 11
Why Interest Rate Risk Should Not Be Ignored 11
Derivatives can be dangerous …….……..….………………………13
Conclusion 16
References 19

Introduction
Warren Buffet said that “Derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”
Derivatives are financial instruments, the price or value of which is derived from some other asset, index, value or condition known as underlying assets. Derivative trade does not involve actual trade in the underlying asset but an agreement to exchange cash or assets over time based on the underlying asset. Most derivatives carry high leverage meaning that a small change in the underlying assets results in a large change in the value of the derivative.
Derivatives play a vital role in risk management of both financial and non-financial institutions. But, in the present world, it has become a rising concern that derivative market operations may destabilize the efficiency of financial markets. In today’s’ world the companies the financial and non-financial firms are using forward contracts, future contracts, options, swaps and other various combinations of derivatives to manage risk and to increase returns. It is true that growth of https://www.51lunwen.org/riskmanagement/ derivatives market reveal the increasing market demand for risk managing instruments in the economy. But, the major concern is that, the main components of Over the Counter (OTC) derivatives are interest rates and currency swaps. So, the economy will suffer surely if the derivative instruments are misused and if a major fault takes place in derivatives market.
Derivatives are used by investors to speculate and earn some profits if the value of the underlying assets moves in the direction perceived by them. Similarly, traders use derivatives to mitigate or hedge the risk in underlying assets by entering into a derivative contract whose value moves in the opposite direction to their underlying position.
The use of derivatives can result in large losses if the value of the underlying asset declines or moves in the opposite direction and counter party risk in case of private agreements

References
1. Robert A. Strong. 2005. Derivatives. 2nd ed. South-Western College Pub
2. Jeff Madura. 2006. Financial Institutions and Markets. 7th ed, Thomson Custom Publishing.
3. Stephen Valdez. https://www.51lunwen.org 1997. An Introduction to Global Financial Markets. 2nd ed. Palgrave Macmillan
4. Robert J. Carbaugh. 2009. International Economics. 12th ed. Nelson Education Ltd London.
5. Jorion, Philippe. 2005. Financial Risk Manager Handbook. 3rd ed. Hoboken, N.J.: Wiley-Finance.
6. Malevergne, Yannick & Didier Sornette. 2006. Extreme financial risks: From dependence to risk management. The Netherlands: Springer.
7. Markit. 2007. Creditex, Markit successfully complete first electronic tradeable tranche fixings. Press release. [Online].　Available: https://markit.com/marketing/press_releases. php?date=05Feb2007 ［February 5.2007］
8. Lowenstein, Roger. 2000. When genius failed: The rise and fall本论文由英语论文网提供整理，提供论文代写，英语论文代写，代写论文，代写英语论文，代写留学生论文，代写英文论文，留学生论文代写相关核心关键词搜索。