A Legislation on Derivative Products: The Chicago Board of Trade

Regulations of financial institutions have always followed financial crisis and failures. Market failures and crisis are the primary triggers of that lead to the development of regulations of financial markets and institutions (Howells and Bain, 2004).

This section of the paper consists of three main parts. First, the research questions that will be addressed, the expected hypotheses and an identification of independent and dependent variables. Second, the supporting literature for the hypotheses is discussed. Third, a conceptualization (definition) and operationalization (measurement) of each independent and dependent variable. Research Questions

In the proposed study, two tools will be utilized to measure one independent variable and one dependent variable outlined below.

In the recent times credit derivatives have become a very popular financial security for investors. If we take a look at the chart given below we can see how the popularity of credit derivatives increased in the past decade. The maximum volume of derivatives was traded during the years 2005 to 2007 of which 2006 was the highest at $2000bn. Then when the financial crisis occurred at the end of 2007 the trading decreased rapidly the following two years to as low as $100bn in 2009. There has been claims from financial critics that these credit derivative are the main factor that has lead to the almost collapse of the world financial markets and if corrective measures

Commodity derivatives markets have been in presence for a considerable length of time, driven by the endeavors of producers, users and speculators(investors) to deal with their business and financial risks.

“A complex network of financial derivative products held globally, started to un-ravel, US mortgage crisis was only the tip of the iceberg”.

Next, the procedure for developing and validating the instrument is described. The data collection method is detailed subsequently and the chapter ends with the selection and suitability of analysis tools.

First, product or services offered or promote to the customers should be based on the product or services’ truth or real information. Misleading word or over-praised of the product or services provided which violates the rules under Trade Practices Act are not allowed. The products or services should be presented morally, correctly, and fairly without confusing or ambiguous. Second, the price of the product or services provided should not be over-price or underpriced or unreasonable price. We should not take advantage of customers who have less knowledge or do not have a clear understanding about the market price during the promotion or advertising of the product or services. We should not lower the services or

In the financial sector, derivative is defined as a contract whose value is derived from the value of an underlying asset.[footnoteRef:1] Derivatives contracts are agreements between two parties who have a deal upon a specific asset. Derivatives are the most innovative and flexible financial instruments, as their application is addressed to market players who need to reduce risk, since they provide a means for shifting risk from one party to another that is willing or better able to monitor that risk.[footnoteRef:2] [1: Michael Chui, Derivatives markets, products and participants: an overview (2012), IFC Bulletin No 35, Bank of International of International Settlements, p 1 ] [2: Alan N. Rechtschaffen and Jean Claude Trichet, Capital Markets, Derivatives and the Law: Evolution After Crisis, Derivative, 2nd edn, Oxford University Press (2014), 2 ]

12 years ago, Warren Buffett warned that derivatives were “financial weapons of mass destruction” (Lenzner). 6 years after he made this statement, derivative traders helped induce the biggest financial crisis in America since the Great Depression. Derivatives are highly complex financial instruments that have fundamentally changed the way we perceive finance. Trading these derivatives has caused a financial revolution that has generated both a huge amount of potential, and an an equally huge amount of risk. Derivatives, in a nutshell, are highly complex financial instruments whose values are dependent on, calculated

Despite the fact, that there are some limitations, mostly connected with the size of the sample used in this research, the study still has both theoretical and practical value. The results of it also study contribute to existing gap in the academic literature.

This study will employ qualitative research which entails designs, techniques, and measures that generate discreet numerical data. The research design that will be used thereafter is correlation research.

Virtually all financial decisions carry some implication of risk, because of the uncertainty of the future. However, the concept of market transparency suggests that regulators and ordinary consumers do have the ability to try to predict what will occur, based upon the knowledge of a company's holdings. However, the use of derivatives means that it is very difficult for ordinary consumers to accurately value the level of risk they are entering into, because there is little transparency about the real level of risk or the value of the financial instrument in question. Despite the calls for transparency in the new global economy and increased public scrutiny of business activities, the level of complexity of the derivative market makes it difficult for ordinary shareholders or even government agencies to follow and monitor it (Ferrell, Fraedrich & Ferrell 2008: 280). Derivates "are contractual arrangements between two parties at least one of which is likely to be a giant financial institution that transfer risk. They typically have

Some points about the methodology and method employed in the research have been mentioned above. In this section, a deeper discussion will proceed covering merits and drawbacks of certain items. Furthermore, a tentative suggestion of another way of designing the research will be provided.

First, this research work introduces the topic under investigation. We discussed the Background of the study, problems statement, objectives(s) settings, scope description, hypotheses, and significance of the study, limitations and definition of key terms.