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Financial Derivatives: Application and Risk Management

In: Proceedings of the 2022 2nd International Conference on Economic Development and Business Culture (ICEDBC 2022)

Author

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  • Feiran Xiang

    (McMaster University, DeGroote School of Business)

Abstract

ABSTRACT While financial derivatives are a necessary hedge in today's financial markets, they also carry substantial risks. There has been a steady stream of cases of significant losses incurred by companies investing in derivative financial instruments around the world. The highly leveraged nature of derivatives has created a crisis in the financial system. This paper uses a combination of theoretical analysis and case analysis, starting with introducing the origins of derivatives, the principles of trading and the explicit and potential risks that may be encountered. Then, two specific corporate case studies are presented to demonstrate the improper usage of financial derivatives and the crisis that might result from an ineffective risk management strategy. Finally, recommendations for risk management and derivatives regulation systems are presented. It is hoped that the research in this paper will lead to a better understanding of the importance of strengthening regulation and risk-aversion awareness in the financial derivatives market. In addition, provide existing companies with a new approach to derivatives risk management to help the financial derivatives market achieve steady growth.

Suggested Citation

  • Feiran Xiang, 2022. "Financial Derivatives: Application and Risk Management," Advances in Economics, Business and Management Research, in: Yushi Jiang & Yuriy Shvets & Hrushikesh Mallick (ed.), Proceedings of the 2022 2nd International Conference on Economic Development and Business Culture (ICEDBC 2022), pages 890-895, Springer.
    • Handle: RePEc:spr:advbcp:978-94-6463-036-7_131
    DOI: 10.2991/978-94-6463-036-7_131
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