Financial Derivatives Instruments

In the 1970s, the Bretton Woods System which oriented in US dollar went through a series of crisis and finally disintegrated in 1973.Under such condition, many countries started to utilize floating exchange rate system, thus led fluctuations among each countries’ exchange rates. This phenomenon brought high risks among international trades. The traditional financial tools and market can not satisfy the need of hedging any more. Hence, the derivatives came onto the market. In the first part of this essay, I will introduce what are derivatives and explain under what conditions will they be used. In the second part of the essay, I am going to analysis the strong points and the weaknesses of using derivatives, both from the general aspect and detailed perspective. At the last part of my essay, I will connect the derivatives with the macro environment---the world financing environment and analysis to what extent did derivatives influence the Global Financial Crisis.

Brief introduction of derivatives and for what reasons do we use them
Derivatives are also called derivatives instruments, which refers to the risk and management tools developed from basic financial instruments. In other words, it represents the financial instruments which derivate from the original ones such as shares , bonds and currency and other basic financial instruments. Derivatives include foreign currency futures and currency options and forward as well as the Swap. Currently, at world’s main Mercantile Exchange derivatives have been the major instruments for financial dealing. The reasons for this rapid growth of derivatives can be classified into three aspects: the first is the implementation of floating rate system since 1980s , the second reason is the rapid growth of virtual economy and information technology(Staiger, D., and J. Stock. 1997 ). The last reason for this is the improvement in financial instruments and systems . Derivatives have the following four functions. 1)Avoiding risks