CPD Principles of Futures Derivatives
History is littered with examples of financial institutions and companies that have endured deep crises, or indeed collapsed, due to misjudgements. These could be misjudgements due to the price of oil, due to the price of property, due to the gold price and are often the misjudgements on the direction of an exchange rate or an interest rate. The fact that these positions were taken with derivative instruments is ultimately irrelevant. The real problem was the “original wrong” view on the market. To blame derivative transactions is like saying that it was the bullet that killed
the person, when in fact it was the man who fired the gun who was at fault!
Negative publicity surrounding derivatives means that the uninformed or misinformed company may interpret the use of any derivatives as highly speculative – even when they are used for risk management. The term derivative seems enough to strike fear into the boardrooms of some of our major companies.
Used correctly, derivatives perform hedging and risk management functions; used incorrectly and speculatively, derivatives can lose you (or make you) large sums of money!
In the words of a prominent industrialist, “as the role of derivatives in risk management grows, it is essential that the treasury functions within a business become increasingly adept at making proper and effective use of these instruments.” Source: Mastering Derivatives Markets – Francesca