A derivative is fundamentally a form of security. It is dependent upon the derived form of one or more assets. The derivative is a form of contract between two or more stakeholders that is based on the asset or asset value. The underlying asset of the derivative can be equity, commodity, four or other forms of asset (Singh, 2010). It can be comprehended that the value of the derivative is the value of the asset that has been originally considered. There are number of factors intrinsic and extrinsic factors that influence the value of the pricing of the derivatives. It has been found that the roles of the derivates in the financial markets are subject to many fluctuations. Even though the derivative in itself is used as a form of security it is subject to many forms of risk in the financial markets. These factors need stop be probed in order to minimize risk of the derivatives. There are numerous efforts taken by the companies to reduce the risk of security and to maintain stability in the pricing and the risks of the product. Some of these efforts are taken by the companies themselves or it is undertaken by the governmental system across the spectrum.
Specific purpose of analysis of this essay is to look into the role of derivates in the financial markets, probe into the factors that can minimize risk of the derivates and to regulate the derivates in the markets. For this purpose there has been utilization of the literature and the resources.
Role of derivative in the financial markets
As mentioned earlier derivates are financial tools that are used to reduce risk in the markets. There are different forms of derivates that are derived based on the asset values. These can be differentiated into option, swap and future. Companies utilize these tools to ensure that they reduce risk in the financial markets (Bernanke, 2006). Understand the nuance and the exact role of the derivates in the financial markets. There is a need to look into the different kinds of derivatives that actually exist in the markets. In reality the derivates are defined based on the stakeholders of the process. Nevertheless the derivates can be broadly differentiated into these factors mentioned above.