Derivatives, Derivative Transactions on the Money Markets

The article defines the derivatives and introduces their use. After that it analyses the main types of risks: market-credit-operational and legal risks. Furthermore, it describes the growth of derivates in relation to the connecting markets. Finally, it discusses the impacts of the derivative transactions on the safety of the whole financial system and the entire economy. The derivative transactions are considered to be a contract or an agreement applying to the change of payments-as its name indicates- it is an another tool, a reference rate which is derived from the index value. Emerging and spreading of the derivative transactions significantly altered the financial markets over the past 25 years. They not only increased the number of possible business types, but showed new ways towards understanding, handling and numerical quantification of financial risks. Nowadays most significant institutional investors and borrowers use derivative transactions, and many of them act as dealers and middlemen for these businesses. The principles of derivative transactions are simple, their use is flexible and many-sided. Any market participant/ who is imposed to the undesirable risk can shift that on the other party and can take other risk or pay in cash in return. The reasons for spreading of derivatives were the efforts, which aimed at reaching higher yield, lower financing costs and the aim to control risks.