This paper explores the topic of financial derivatives.
The paper attempts to answer the following questions:
1) What are derivatives?
2) What purpose do they serve?
3) How are the risks calculated?
4) What methods of accounting are generally accepted?
By best estimates, companies and banks around the world are involved in some 52 trillion dollars worth of financial derivatives.
The paper explains these concepts and discusses their importance.
Since the concept behind derivatives is foreign exchange rates, then the concept really derives from 1971 when America abandoned the gold standard and fixed exchange was replaced by floating exchange. The floating exchange rate gave birth to the need for hedging" (protecting assets against unfavorable movement). The need to hedge, in turn, gave birth to the concept of exchange rate futures, an idea that the "Merc" introduced in 1972. The "Merc" (Chicago Mercantile Exchange) first listed currency futures and the idea of selling and buying investment stakes in the future value of a nation's currency was born.
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