Explain in detail the use of financial derivatives to
manage the risks associated with financial market?
What is financial derivatives?
What is the advantages of derivatives in trading? Give examples
What is the advantages of derivates on public exchange?
What are derivatives futures, options swaps, swaptions and options and how it is applied to manage risks associated with financial market.
What are the main risks of derivatives on financial markets (gives examples)
Credit hazard infers a potential hazard that the counterparty of an advance understanding is probably going to neglect to meet its commitments according to the first advance assention, and may in the long run default on the commitment. Credit dangers can be ordered into numerous structures, for example, alternatives , values , shared assets , bonds , advances and other budgetary issues too , which in augmentations of certifications and the settlement of these exchanges. (Universal Auditing Practice Statement 1006 Audits of the Financial Statements of Banks) IS IT Important For the Banks To deal with Their Credit Risks ? Hazard is constantly connected with the managing an account exercises, and going out on a limb is the critical piece of any saving money task, there is not really any keeping money activity without the hazard. A large portion of the brokers are said to be sound when they have a reasonable outline of what is the measure of hazard engaged with the present exchange and they ensure that a portion of the halfway income are in this manner kept for these dangers. The conceding of any type of credit is the normal shape for any bank and this hazard is extremely normal and this is the wellspring of dangers the banks are constantly presented to. (Anderson et al, 2001). By being presented to credit hazard banks have been looked with a considerable measure of issues. The banks couple of years back understood that credit hazard is vital and the banks need to screen, distinguish, control and measure it is exceptionally huge. Because of this the successful administration of credit hazard has turned into a basic segment of moving toward chance administration. This approach will be particularly vital regarding the long haul achievement of any bank. Banks presently guarantee that they have expansive measure of capital against any type of credit hazards so they can be in a situation to satisfactorily handle any dangers which will be acquired. (Bank for International Settlement, 1999) The credit chance is in the whole arrangement of any bank and furthermore the hazard which is related in singular credits or some other exchanges must be overseen satisfactorily. It is dependably a learned that the connection between the credit hazard and different types of dangers require be to viewed as truly in to account, with a specific end goal to Increment investor esteem through esteem creation, esteem conservation and esteem enhancement Increment trust in the commercial center Reduce administrative limitations and bends (Amitabh Bhargava ICICI, 2000) The Basel II Accord indicates that banks must have new systems for estimating against credit dangers. Focal points and Disadvantages of Credit Risk Management The upsides of Credit chance administration include: Credit hazard administration permits anticipating and estimating and furthermore estimating the potential hazard factor in any exchange. The banks administration can likewise make utilization of certain credit models which can go about as a profitable apparatus which can be utilized to decide the level of loaning estimating the hazard. It is constantly better to have some elective methods and methodologies for exchanging credit, estimating and supporting choices. The inconveniences of Credit hazard administration include: Settling on how great a hazard you are can't be totally logical, so the bank should likewise utilize judgments. Cost and Control related with working a credit scoring framework. With the presence of various models, it?s difficult to choose which to utilize, as a general rule, organizations will take a one model fits all way to deal with credit hazard, which can bring about wrong choices. How Banks Measure Credit Risk The level of credit hazard looked by a bank is given by the structure of a bank?s credit portfolio. On the off chance that the portfolio comprises of substantial measure of advances in a specific resource class then this may be a sign of an expanded hazard. Correspondingly the nearness of complex money related exchanges, for example, loaning may likewise show a bigger hazard. All in all a hazard dependably involves two sorts: One is chance presentation and the other one is the vulnerability component, and for the credit chance and the credit quality speaks to the vulnerability component and credit introduction speaks to chance presentation. Along these lines a bank can evaluate its credit hazard by dissecting the credit nature of a commitment and its credit presentation. While surveying credit quality and presentation a bank must consider three issues: Likelihood of default or any kind of probability whether the other party which is the counter party will default on the commitment either finished the life of the commitment over a particular timeframe. The presentation of credit or the measure of the exceptional commitment which again relies upon the size if there is any instance of default. Rate of recuperation this is the degree towards which the credit can be recouped through some keeping money forms like chapter 11 and different procedures of settlements. In the most recent decade or such a large number of banks have begun to make utilization of models with a specific end goal to survey the dangers for their credit which they loan. The credit hazard models are exceptionally unpredictable and incorporate calculation based strategies for surveying credit chance. The point of such model is to help banks in evaluating, conglomerating and overseeing credit chance. Regardless of the strategy the focal point of credit chance appraisal stays credit quality and hazard presentation. Investigation of the Quality of (Credit Quality) Credit quality is a measure of the that counterparties?s capacity to perform on that commitment?. (Possibility Analysis, 2003) A bank receives diverse methodologies for evaluating credit nature of thinking about advances to people or organizations. On the off chance that it is for independent companies then the credit quality will be evaluated through a procedure of credit scoring. This depends on data got by the bank about the gathering who need the advance. The data which is assembled has a tendency to be about yearly salary, existing obligations and so on. Financial assessment is by and large ascertained by a recipe which is connected to the data which is gotten which gives a number in view of it the score is created. The financial assessment is a very exact expectation of how likely the gathering is to pay charges, the higher the score the better it looks to the bank. (Curry, 2007) In any case, surveying a huge gathering depends using a loan investigation of the advance done by uncommonly assigned credit experts. This simply like specify above is base using a loan scoring however it includes human judgment. It includes an inside and out investigation of different part of the gathering being referred to including asset report, wage articulation and so on. Likewise surveying the idea of the commitment is considered also. On premise of credit investigation the investigator allots that gathering a FICO assessment. This enables the bank to settle on choices with respect to credit. A bank can likewise utilize FICO scores to quantify the offer of the borrowers with financial soundness in its portfolio and get a reasonable sign of default hazard. Estimating Credit Exposure Credit introduction additionally should be considered while surveying credit hazard or hazard presentation. On the off chance that for instance a bank has advanced cash to a business, the bank may compute the acknowledge presentation rate as the extraordinary adjust on the advance sum. Be that as it may, in the event that if the bank by any possibility has expanded or broadened the credit extension however none of the line have been drawn down then the approach will be unique. For this situation the hazard presentation may appear to be nil, yet it doesn't mirror any kind of ideal without anyone else's input to draw down the credit extension. On the off chance that the firm gets into any money related trouble it can be relied upon to draw on the credit line before any chapter 11. Hence for this situation the bank may view its acknowledge introduction as equivalent to the line of the credit. Acknowledge presentation as a division can likewise be utilized now and again to figure the credit introduction for the aggregate credit extension. (Duffie and Singleton, 2003)>GET ANSWER