an Eldis Resource
Using financial futures in trading and risk management
Authors:
Ignacio Mas; JesGs SaD - Requejo
Publisher:
Policy Research Working Papers, World Bank, 1995
Financial futures have become the cornerstone of financial management. The paper explains the contractual features of an array of financial futures, basic pricing relationships, and how futures can be used by investors and risk managers.
Mas and Sa Requejo explain the features of an array of futures contracts and their basic pricing relationships and describe a few applications to show how investors and risk managers can use these contracts.
Futures --- and derivatives generally --- allow economic agents to fine-tune the structure of their assets and liabilities to suit their risk preferences and market expectations. Futures are not a financing or investment vehicle per se, but a tool for transferring price risks associated with fluctuations in asset values. Some may use them to spread risk, others to take on risk.
Financial futures (along with options) are best viewed as building blocks. Futures have facilitated the modern trend of separating conventional financial products into their basic components. They allow not only the reduction or transformation of investment risk but also the understanding and measurement of risk.
The market for derivatives has grown enormously over the past decade. The value of exchange traded eurodollar derivatives (futures and options) is equal to roughly 13 times the value of the underlying market. The volume of trading in financial futures now dwarfs the volume in traditional agricultural contracts.
As emerging markets develop, given their inherently risky nature, expect financial futures to play a prominent role in risk management.
This paper --- a product of the Private Provision of Public Services Unit, Private Sector Development Department --- is part of a larger effort in the department to promote risk management techniques in emerging markets. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Kay Binkley, room E1243, extension 81143 (52 pages)
