Introduction
Risk Management is not about the elimination of risk; it is about the management of risk; selectively choosing those risks an organization is comfortable with and minimizing those that it does not want. Financial Derivatives served a useful purpose in fulfilling risk management objectives. Through derivatives, risks from traditional instruments can be efficiently unbundled and managed independently.
Hedging Against Unwanted Risk
Used correctly, derivatives can save costs and increase returns. Financial derivatives can be used in two ways; to hedge against unwanted risk or to speculate by taking apposition in anticipation of a market movement. Organizations today can use financial derivatives to actively seek out specific risks and speculate on the direction of interest rate or exchange-range movements, or they can use derivatives to hedge against unwanted risk. MBA in Operations Management in Bangalore
Derivatives in Managing Risk
Derivatives trading help improve market liquidity, raises skills and knowledge among market players, and is a vital ingredient of market reforms such as the transition to rolling settlement. Derivatives trading include Futures contracts, Option Contracts, Index Futures, Index Options, Commodity Derivatives, and Swaps. When using financial derivatives, however, organizations should be careful to use only those instruments that they understand and that fits best with their corporate risk management philosophy.
Usage of Derivatives
Financial derivatives can be used in two ways; to hedge against unwanted risks or to speculate by taking a position in anticipation of a market movement. Organizations today can use financial derivatives to actively seek out specific risks and speculate on the direction of interest-rate or exchange-rate movements, or they can use derivatives to hedge against unwanted risks. Hence, it is not true that only risk-seeking institutions use derivatives. Indeed, organizations should use derivatives as part of their overall risk-management strategy for keeping those risks that they are comfortable managing and selling those that they do not want to others who are more willing to accept them. MBA programs in Bangalore
Even conservatively managed institutions can use derivatives to improve their cash flow management to ensure that the necessary funds are available to meet broader corporate objectives. One could argue that organizations that refuse to use financial derivatives are at greater risk than those that use them. Derivatives help to improve market efficiencies because risks can be isolated and sold to those who are willing to accept them at the least cost. Using derivatives breaks risk into pieces that can be managed independently. Corporations can keep the risks in which they are most comfortable. From a market-oriented perspective, derivates offer the free trading of financial risk.
Conclusion
It is important that all users of derivatives, regardless of size, first of all, understand how their contracts are structured, the risk characteristics of those instruments are also very important. A perfect risk management strategy that conforms to the goals of the business, without a clearly defined risk management strategy, the use of financial derivatives can be dangerous
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