Risk factors in derivatives markets

Abstract

Objective: The objective of the article is to analyse and present the classification of risks actual to derivative securities. Research Design & Methods: The analysis is based on classical and modern literature findings and analysis of newest statistical data. Findings: Despite their purpose to hedge from risks, derivative contracts are risky as every financial activity in the market. The analysis led to the conclusion, that the main risks typical for derivatives contracts and their traders are market risk, liquidity risk, credit and counterparty risk, legal risk and transactions risk. Pricing risk and systemic risk is also quite important. The analysis showed that market risk is the most important kind of risk that in many situations influences the level of remaining risks. Market risk occurs when the investor misjudges the market direction, counterparty risk occurs when misjudgement refers to the business partner. Some risks exist despite the employment of derivatives. Implications & Recommendations: It was suggested that risk of derivative contracts can be related with the following factors: main characteristics of contracts; trading conditions; position assumed in the contract; complexity of the contract. Contribution & Value Added: The originality of this work lies in studying various aspects of risk factors influencing the risks of derivative securities and suggested classification of these factors.