Derivatives help financial firms manage risks, they also help companies make money . Yes this is correct from years Banks trade on derivatives to hedge against risk as well as to make for money. Actually derivatives trading is insurance against possible losses. the LeyMan Brothers got accelerate negative impact on 2008 because they have high holdings of default swaps.
After 2008, when financial market where about to crash like after Second World War, many banks earned a lot of cash on Credit Derivatives.Banks had no choice other than to trade on derivatives for profit making.
Derivative Trading seems soft and profitable however it is also responsible for all of kind of losses even in sucess markets. One's risk is transfer to another and it continues endless. Failure of Confidence in Over Confidence stats creates instability and derivative seems failure becuase it create loss for entire system. For example when banks felt problem with credit consumers all markets get suffered and the Whole World is suffering economic crisis till today 11th July 2010.The global economic crisis has shown, derivatives are at once a cause and an effect of financial instability.But we have no choices we need money, interest rate, credit and equities . The sequence will eventually effect the price of commodities.
We have heard futures trading on Gold, Silver, OIL etc on CME. We would like to list out the derivatives that banks trade in general. The Top five class of assets that banks are mostly engaged are :
Top four items are common to us. Credit Asset is such a derivative which hold future of entire banking system.
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