R ECENT DEVELOPMENT IN GLOBAL FINANCIAL DERIVATIVES

W HAT IS FINANCIAL DERIVATIVE A financial derivatives A financial derivative is a financial product that is valued depending on another asset, called the underlying asset. It is used to protect against and manage risks, and very often also serve arbitrage or investment purposes, providing various advantages compared to securities.

U SE OF DERIVATIVE Derivatives make future risks tradable, which gives rise to two main uses for them: It eliminates uncertainty by exchanging market risks, commonly known as hedging. The second use of derivatives is as an investment. It is an alternative to investing directly in assets without buying and holding the asset itself.

F ACTORS CONTRIBUTING GROWTH OF DERIVATIVES Price Volatility. Globalization of the Markets Technological Advances Advances in Financial Theories

D EVELOPMENTS IN FINANCIAL DERIVATIVES The first exchange-traded financial derivatives emerged in response to the collapse of the Bretton Woods system of exchange rates established in In 1971, the U.S. Treasury abandoned the gold standard for the dollar, causing the breakdown of the fixed-exchange, which was replaced by a floating-rate exchange system. Foreign currency futures were introduced in 1972 at the Chicago Mercantile Exchange ("Mere"). In 1973, the Chicago Board of Trade (CBOT) created the Chicago Board Options Exchange (CBOE) to facilitated the trade of options on selected stocks.

In October 1979, the Federal Reserve Board decided to abandon its earlier policy of setting interest rate targets and replaced it with money supply targets. The Merc and the CBOE responded to the needs of portfolio managers by introducing futures contracts on equity indexes in the early 1980s

R ECENT DEVELOPMENTS IN GLOBAL FINANCIAL DERIVATIVE More sophisticated derivative pricing model More realistic assumptions The new generation Better risk systems More global dissemination of derivative prices Helping market liquidity & efficiency

Dissemination off implied volatilities Dissemination of stock futures & sector based derivative values

CONCLUSIONS Dodd-Frank aimed to rein in abusive lending practices and high-risk bets on complex derivative securities that nearly drove the banking system off a cliff. In recent years, they have become based on speculation so much that derivatives are no longer realistic. Derivative market- a massive bubble