Derivatives and Risk Management

Preface

The deregulation of markets and interest rates in the early 1970s resulted in a phenomenon whereby interest rates came to be determined primarily by the market. Currency exchange rates followed quickly and, in course of time, both became increasingly volatile.

These developments resulted in the emergence of a slew of never-before-seen risks for organizations. Fluctuating interest and currency exchange rates, together with the constantly changing commodity prices, created risks that had to be mitigated to maintain the accuracy of forecasts regarding future cash flow. This need gave rise to a new kind of financial instrument—derivatives. Derivative securities, viewed as an exotic practice, were predominantly used in the US market in ...