Derivatives : A Mode of Minimizing Risks
“The flexibility and stability that is possible with derivatives is not only valuable for individual business concerns but benefits the economy also. ”
Derivatives, to use a simple language, are certain financial measures by means of which a business concern is able to reap rich profits. Most commonly, an essential asset is at the core of such profits. These derivatives are put in use by many a company to safeguard themselves against frequent economic troubles.In the recent past there has been much hue and cry over these derivatives and it has been alleged that these derivatives are the main source of financial bungling by various companies.
Many companies have had to face the law because of them and some even have had to face bankruptcy when certain financial frauds became exposed. Nevertheless, as commonsense would tell, it’s not the derivatives but their wrong use that is to be blamed for such financial debacles.
On the other hand, the flexibility and stability that is possible with derivatives is not only valuable for individual business concerns but benefits the economy also.
Whether it’s equity prices, exchange rate or interest you are free to use derivatives with respect to any of them. By using them you are able to bring down those risks that fall in the non-essential category and hence are able to prevent losses.
Not only this, the economy also gets stabilized all together because the percentage of those businesses that are in potential financial doldrums is much reduced in this way.
However, you should exercise extreme caution while taking resort to derivatives. The first thing is not to fall prey to any kind of credit risk. It’s been a very common phenomenon that companies who use derivatives face credit risk even after utilizing collaterals for their aid.
Another thing of concern is the calculation of correct interest rates while using derivatives. It’s such a cumbersome exercise that many companies are not able to forecast the long-standing as well as immediate interest rates with reliable accuracy. The result is the loss of a huge amount of money. Such a scenario can be extremely perilous for small businesses and ventures.
So, you should develop such a derivative policy for your company that your cost management becomes foolproof. Your primary aim should be to reduce expenses and outlays.
Author - DeeKay
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