Financial Derivatives Market

Xingyun Peng

Chapter 12 in Financial Theory:Perspectives from China, 2015, pp 283-317 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Stock, bonds, deposits, and other such items which we have already discussed are all underlying financial products, which are also called primary financial instruments, and they primarily function as a medium for transferring savings into investment, or as a certificate for credit–debt settlements. Correspondingly, there are also derivative financial instruments. Derivative financial instruments are financial products, including futures and options, which are derived from underlying financial instruments, the main function of which is not to regulate a shortage or surplus of funds or directly facilitate the transfer of savings to investment, but instead is to manage the risk exposure that arises in connection with the underlying instruments. Similar to stock, bond, and other underlying financial instruments which can be traded on a secondary market, the prices of derivatives in a transaction are determined by supply and demand on the market, and fluctuate with changes in the market environment, which provide profit-making opportunity for speculators. However, it is important to note that the improper use of derivative financial instruments will lead to unbearable losses. Unlike the transaction of underlying financial products, where the buyer and seller will exchange monetary and equivalent financial assets at a certain time after the transaction and in accordance with the full amount of the transaction, some of the financial derivative contracts do not involve the delivery of the principal and are often called non-deliverable derivative transactions…

Keywords: Monetary Economics; Financial Markets; Monetary Policy; Financial System; Financial Development (search for similar items in EconPapers)
Date: 2015
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