The Power of Derivatives in the Global Financial System

Seminararbeit , 2009 , 22 Seiten , Note: A

VWL - Geldtheorie, Geldpolitik

This work is to discuss the role and power of derivatives in the global financial markets and their ability to reduce, diversify and enhance risks associated with international capital flows. During the last two decades derivatives, as fiscal instruments, experienced enormous growth and gained increasingly of importance. This is mainly due to their ability to allow the spreading of risks in cross border capital movements, making such investments more appealing and the diversification of portfolios more likely. Yet, derivative markets are controversial because they are not well known outside a small group of specialists. Most people look at them with suspicion and focus on their role as highly effective instruments for speculation. Given the leverage they provide fortunes can be made or lost in the wink of an eye.
Although derivatives do not create anything it will be shown in the course of this study that the importance of derivatives lies in the fact that they can be used to reduce, diversify and control uncertainty and risks associated with various corporate activities, thus creating substantial benefits as well as complexities. Section one is going to define the most common derivative products before addressing their general purpose followed by exemplifying two principal risks aligned with the use of derivatives, namely credit- and market risk.
Subsequently this works is going to discuss the positive as well as the negative effects derivatives may have on banks and investors. Sections five, six and seven will then illuminate systematic predicaments, address risks and eventually conclude after having considered the entanglement and market share of derivatives. Warren Buffett, Forbes-listed as the richest person in the world, has called credit derivatives financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal. Nominally they are insurances against defaults, but they encourage greater gambles and credit expansion, which are moral hazards whereas Alan Greenspan, on the other hand, observed that derivatives have come to play an exceptionally important role in our financial system and in our economy. These instruments allow users to unbundle risks and allocate them to the investors most willing and able to use them. It is this study’s object to illuminate the complexity of derivatives and exemplify both, their advantageous and unfavourable but yet undeniably powerful characteristics.

Inhaltsverzeichnis (Table of Contents)

• I. Introduction
• II. Discussion
  • 1. Defining derivatives
  • 2. General purpose of derivatives
  • 3. Addressing the main risks
  • 4. Derivatives: leading to complex banking & immediate effects for investors
  • 5. Systemic predicaments arising from derivatives
  • 6. Extensive popularity of complex derivative products
  • 7. The Power of Derivatives-derived from extensive market share and entanglement
• III. Conclusion

Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)

This work aims to explore the role and influence of derivatives in the global financial markets, analyzing their ability to manage, diversify, and enhance the risks associated with international capital flows. The paper examines the significant growth and increasing importance of derivatives in recent decades, focusing on their capacity to facilitate risk-sharing in cross-border capital movements. The study also investigates the controversial nature of derivative markets and their potential for both positive and negative impacts on banks and investors.

• The role of derivatives in managing and diversifying risks in global financial markets.
• The potential for both benefits and complexities associated with the use of derivatives.
• The impact of derivatives on banking and investment practices.
• The systemic risks and challenges associated with the widespread adoption of derivatives.
• The entanglement of derivatives in the global financial system and their influence on market share.

Zusammenfassung der Kapitel (Chapter Summaries)

The paper begins by defining derivatives and their general purpose, highlighting their complexity and significance in the global marketplace. It then explores the main risks associated with derivatives, specifically credit risk and market risk. The paper further discusses the positive and negative effects of derivatives on banks and investors, examining their impact on banking structures and investment strategies. The study concludes by exploring the systemic predicaments arising from the use of derivatives, addressing the risks involved, and considering the entanglement and market share of these financial instruments.

Schlüsselwörter (Keywords)

The main keywords and focus topics of this work include derivatives, global financial markets, risk management, international capital flows, credit risk, market risk, banking, investment, systemic risk, market share, and entanglement. These terms encompass the primary themes and concepts explored in the study, providing a comprehensive overview of the research focus and key areas of investigation.

• Hochschule: City University London
• Note: A
• Autor: Maximilian A. Killinger (Autor:in)
• Erscheinungsjahr: 2009
• Seiten: 22
• Katalognummer: V142508
• ISBN (eBook): 9783640507221
• ISBN (Buch): 9783640507108
• Sprache: Englisch
• Schlagworte: Power, Derivatives, Global, Financial, System