Risk of Derivatives Essay Example | Topics and Well Written Essays - 500 words

Risk of Derivatives - Essay Example Derivatives are either traded in stock markets or can be quickly made or created through any financial institution (including banks). Derivatives are widely used these days by corporate entities and other users in order to manage and control the risks associated with financial transactions and to limit the risks of changes in rates of commodities, interest rates, market conditions, or foreign currency rates. Derivatives can occur in many forms and types â€Å"including futures, forwards, swaps, options, structured debt obligations, and deposits,† (Comptroller of the Currency Administrator of National Banks, 1997, p. 1). These financial instruments produce many risks for the users and both the parties involved (that is, the drawer and the drawee of the derivative contracts). Some of the dangers include the risk of change in the price of the derivative itself, a change in interest rates, and a change in foreign exchange rates, if applicable, to name only a few. In this paper, the manageability of risks of derivatives, as per the given text, is discussed and evaluated. The ideas of Thomas A. Bass, who considers that the risks of derivatives are manageable are compared and evaluated with the ideas presented by Justin Welby who argues that the risks of derivatives are not controllable. The management of risks associated with the use of derivatives and the ideas and conclusions of two authors, Bass and Welby, were discussed. In his article, â€Å"The Ethics of Derivatives and Risk Management,† Welby’s view was that the vast use of derivatives in the financial markets these days in order to reduce certain financial risks and control them is itself quite dangerous. However, the risks associated with the derivatives are quite doable with the help of implementing ethical investment policies, including transparency, governance, and so forth. He believed that derivatives are those financial instruments that can be used to â€Å"alter the risk profiles† rather