THE ROLE OF DERIVATIVES IN HEDGING FINANCIAL RISKS
DOI:
https://doi.org/10.29121/shodhkosh.v3.i1.2022.4081Keywords:
Derivatives, Hedging, Financial Risk Management, Risk Mitigation, Futures Contracts, Options, Swaps, Financial Instruments, Market VolatilityAbstract [English]
Financial instruments known as derivatives, which get their value from an underlying asset, index, or rate, are essential for controlling financial risk. Derivatives like futures, options, and swaps are used by businesses, investors, and financial institutions in the contemporary financial environment to protect themselves against possible losses brought on by shifts in the market, interest rates, currency volatility, and commodity prices. Derivatives offer an efficient way to stabilize portfolios and guard against unfavorable price fluctuations by facilitating the transfer of risk between parties. The different kinds of derivatives, their function in risk management, and their effect on financial stability are all examined in this essay. It also explores the tactics used by market players to maximize risk exposure and reduce the possible monetary losses brought on by market uncertainties. The difficulties and moral issues surrounding the use of derivatives, especially in highly leveraged markets, are also covered in the study.
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