How Derivatives Has Increased Over The Recent Years?

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The use of derivatives has increased over the recent years because they are an integral part of the economy. They help firms to manage financial risks that threaten revenue, cost of goods sold and various expenses. Derivatives have existed long for centuries and their recorded history dates back to the sixth century, B.C. (Donohoe, 2015). During this time, goods and services were used in the exchange, however, this proved to be difficult because it was hard to coordinate harvest times for different goods all year round. During the 1800s futures were used in the London exchange to protect against price fluctuations. In this paper, I will examine derivative securities, discuss their roles in the financial market and discuss the role of…show more content…
OTC derivatives are less liquid than the exchange traded securities as there is no guarantee that either partner will consent to the trade. More so, it is usually difficult to locate the other party to the trade. The upside to trading OTC is that the contracts can be customized to suit the customer’s needs because there are fewer restrictions (Foran, & Ramanathan, 1976). It should be noted that the financial crisis of 2008, brought to the realization that OTC derivatives did not deliver and that to standardize derivative trade was the smart way to go. Regulators, then started to push for clear trades through well-capitalized clearing houses. Standardization meant that all market participants traded in limited, uniform set of securities. Futures Contracts Futures are defined as an agreement that obligates the buyer to purchase an underlying security at a specific price in the future (Bodie, et al, 2011). The contracts are standardized and guaranteed by the exchange clearing house because they trade within secondary markets and also often get settled with cash (Donohoe, 2015). Futures trading is considered significant for those products whose demand and actual supply has a lag between such as agricultural and base metal products. A commodity that is purchased on the delivery date indicates that the trader has taken a long position well as the trader who commits to delivering the commodity at the maturity date is said to be in the short position
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