Managing Derivatives Contracts : A Guide to Derivatives Market Structure, Contract Life Cycle, Operations, and Systems

CHAPTER 3

Derivatives and Risk Management

Historically, many failures led risk management to the forefront in financial and nonfinancial institutions. Corporations have been adapting a number of approaches and tools to manage and reduce various types of risks. The risk management function spreads across the organization and all business activities.

Although derivatives are typically used to manage risk, derivatives themselves introduce a new set of risks. Like other instruments, a derivatives contract is also exposed to typical market parameters, and the contract value is subject to change. This value change may impact the hedge being used and require a rebalance. Since the change is continuous, the risk management process becomes an iterative ...