Risk Formation and Prevention of Financial Derivatives

Author: Sun Ninghua
Publisher:
Publish Date: 2004-09-01
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The globalization of the economy and finance has driven the continuous innovation of financial derivative instruments. However, as hedging tools, financial derivatives themselves contain significant risks. In the trading of financial derivative markets, there are four types of information asymmetry, which can easily lead to adverse selection and moral hazard issues, thereby amplifying risks. The micro-risks of financial derivatives may be transmitted to macro-risks. The methods for measuring the risk of financial derivatives mainly include sensitivity methods and VaR methods. Preventing and resolving the risks of financial derivatives require the establishment and improvement of corresponding market systems, regulatory arrangements, and incentive and constraint mechanisms within derivative product companies.