The Impact of Financial Derivatives Market on the Uk Economy-: Before, During and After the 2008 Financial Crisis

Topics: Derivative, Derivatives, Derivatives market Pages: 7 (2465 words) Published: April 8, 2013
Research Proposal:
1-Provisional title: The impact of Financial Derivatives market on the UK economy-: Before, during and after the 2008 Financial crisis. 2-Rationale
The operations of the derivative market has become a rising concern today in the world and in the UK in particular as this market could destabilize the efficiency of the financial market and the economy at large if not managed properly by its users or if a major fault occurs in the derivative market, as it plays a vital role as a risk management instrument in the economy. Financial derivatives had been introduced in the financial markets as an instrument to help manage risk cause by fluctuations in exchange rates, interest rates and stock market prices in the financial market and the corporate world (Gupta S.L.: 2006). Even before the financial crisis, derivative had been an important tool used by companies, authorities, as well financial institutions in the UK to control, shift, manage and hedge against various risks that stems from macroeconomic conditions. They are also often used as an instrument to manage exposures to interest rate, currency and commodity price (Taylor &Francis, 2001). Thus financial derivatives are financial instruments whose values or prices are determined from the value of underlying assets. They are also contracts between two or more parties. This derivative includes; futures, forward, options, or Swaps. The underlying assets are; foreign exchange derivatives, interest rate derivative, credit derivatives and equity derivative. The market where the trade takes place could be exchange traded or over-the-counter. A derivative instrument therefore relates to a future contract between two parties (Gupta S.L.: 2006). Most commentators and witnesses have put forward arguments that the derivatives market had an influence to the financial crisis that began in the summer of 2007, which according to them could have been one of the causes of the financial crisis. They mostly commented on the risk involved with the over-the-counter (OTC) derivative which they said were not sufficiently mitigated. This issue of derivative market involvement in the financial crisis had been politicized due to the alleged claim of its lack of regulations and transparency especially for the OTC derivatives which are a non-standardized type of derivative mostly negotiated by private bodies who do not make their data known to the public except to the intermediary or parties involved in the contracts. This created lots of pressure which has made several regulatory bodies and legislators to ask for a more transparent and regulated control for the market in this instrument ( ). Due to the recent concerns and interest in the derivative market, this has provided a ground for valuable empirical investigation and research due to the enormous size of the UK derivative market and its corporate world in general. This has therefore motivated my interest in this area of study as some researchers had also argued about the fact that derivative market did not have much involvement in the financial crisis. This research aims at investigating how financial derivatives influenced the UK economy (both positive and negatively) before the start of the financial crisis, during the period of financial crisis and after the financial crisis. This research will contribute to the literature review in this aspect as there have not been too many researches as regard to this area. It will also enable us to know how the financial derivative market was run before the financial crisis, how it was run during the financial crisis, how it was run after the crisis and the problem that aroused as a result of its use to the UK economy, how this problem could be solved and avoided in the future. 3-Literature review

According to a research carried out by Gulnur M.Y. (2010), the financial crisis of 2008 had its roots in the sub-prime...
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