Derivatives and financial crisis Assignment Example | Topics and Well Written Essays - 2000 words

Derivatives and financial crisis - Assignment prototypeSuch types of derivatives are ingestiond based on the type of risk exposure i.e. liquidity, financial, exchange step risks, etc (Chisholm, 2011).Derivatives were used primarily to hedge risk, but over time people used it to strive gains egress of the price movements of the central assets. The purpose of using derivatives is incumbent on the investment objective. The price volatility of the underlying influenced various investor community to use derivative as a lucrative investment option. Earlier the use of derivatives was not popular, owing to its complexities it was not considered to be a feasible investment option. Over time, it was adopted by various investors to insure the various risks facing them. With various risk outcomes, the fluctuations in the price of the underlying assets make it volatile. Such price volatility attracted speculators, who engaged in the use of derivatives to earn profits. Speculations are done on both the up trends and down trends of the asset price movements. The impact of speculations is felt across the investor community i.e. the hedgers. Speculators adventure on the direction of the asset price movement. When a speculator feels that the price of the underlying asset provide fall, he will short sell the stock or buy an option. When the price of the asset falls, he exercises the option or buys the underlying asset to make profit. Speculators leverage the vulnerability of the price movements of the asset to make gains. Though all types of derivatives cannot be used to speculate, but futures, options and swaps are lucrative avenues for speculators (Poitras, 2002).From the inception, starting in 1970s and continuing through the 80s and 90s, the financial market evolved and made it a riskier couch for trading. The interest rate changes, bonds and stock markets witnessed phases of increased volatility. Owing to such evolution of risk, investors and managers of financial i nstitutions became wary and resorted to