Use of derivative financial instruments for risk management

Abstract

The dynamic nature of international financial markets has contributed to a broader use of various financial instruments, ranging from the simplest traditional instruments, such as bonds, to various forms of derivatives. A number of economists argue that derivatives were one of the causes of the global financial crisis, due to speculative behaviour, however others believe that these instruments actually improve the functioning of the market and may reduce risk. Derivative financial instruments are transactions that help bankers, investors, and borrowers to protect themselves against certain financial risks. This paper addresses the issue of how to hedge risks by using derivatives in a correct and appropriate way. Since almost all companies and investors who operate in local or global markets are exposed to some risk, it is important to identify the potential uses of derivatives for risk management.