Notes On The Global Financial Crisis

1614 WordsMar 28, 20177 Pages
w how transactions in derivative instruments can be used to either hedge risks or to open speculative positions. 1. Introduction The latest global financial crisis, starting from the United States since 2007, has pushed the financial derivatives to be a hot spot. The publics usually believe that the inappropriate application of derivatives should be to blame for this, which is totally wrong. It is apparent that there is no single financial crisis resulting from only a kind of financial product. Whatever the instrument is, including credit derivatives and basic derivatives, they are only the conducting tools holding by the real culprits. The ultimate cause of this financial crisis is the imbalance of the global economy, or in other words,…show more content…
Unlike a spot contract, it does not exercise immediately after writing. This kind of derivatives is traded in the over-the-counter market. After entering into contract, time passes by, price of the underlying asset may change, interest rate may change, so the market price of the forward contract most likely will change. The market price of the forward contract is therefore variable, but the contract 's delivery price is always the same. As to a forwards, both parties have an obligation to execute the contract at the maturity and since forwards does not require any outlay to enter, the total payoff from the contract is exactly equal to the total profit or loss of the investor from the contract. Most holders of forwards are usually hedgers who is facing potential risks. Since that, they want to use the forwards contracts to avoid the adverse price movements in the future and offset the risk exposure as much as possible. However, speculators are willing to take some risks in the markets for potential equivalent return. Usually, they use derivatives to bet on the future direction of movements in the price and mostly, their counter-party is hedger, due to their exactly different expectations of price movements. Say a shareholder is worrying about the stock price falling so he can conduct a short hedge to avoid unexpected movements of price with a
Open Document