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FT Guide to Banking by Glen Arnold

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21

Futures markets

Derivatives – forwards, futures, options, swaps, etc. – are the subject of this and the next two chapters. Derivatives have become increasingly important financial instruments over the past 30 years. These powerful tools can be exploited to either reduce risk or to go in search of high returns. Naturally, exceptionally high returns come with exceptionally high risk. So traders, bankers and corporate managers using derivatives for this purpose need to understand the risk to which they are exposing their company. Banks are usually at the centre of derivatives trading, dealing on behalf of clients, as market makers, as facilitators in a brokerage or adviser role, or trading on their own account.

What is a derivative?

A

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