Ebook A Global Derivatives Framework for Banks to centrally Manage & Hedge Market Risks in Financial System
Banks have always been central to the financial system in any economy, and by virtue of their role, they are the prime and undoubtedly the most prominent entities to centrally control the risk exposures existing in the financial system. The risks that I refer to here are primarily Market Risk and Credit Risk that exist because of the un-hedged exposures of Banks, Financial Institutions, corporate, and other customers towards the corresponding underlying rate.
The primary functions of the banks is making transactions with other participants of the financial systems whether for extending credit advances, or accepting deposits, or making investments, or carrying out any other transactions. As any participant gets in a financial transaction, immediately it becomes exposed to certain risk elements in the form of financial risks. To the extent the entity is not capable to bear the risk exposure; it would buy protection using various derivatives instrument.
Here is the catch - Derivatives instruments promises to hedge the risk provided the parties involved in the transaction do not default on their commitments. Derivatives are capable of destroying the whole economy if not dealt with properly; yet they can prove one of the most effective and efficient way to manage the risk existing in the financial system worldwide.
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