Financial services ( Derivatives ) Essay Example | Topics and Well Written Essays - 1750 words

Financial services ( Derivatives ) - Essay ExampleIn United Kingdom, derivatives can be traded by two methods to each one through an over-the-counter (OTC) or organised exchange. The exchange traded derivatives market is controlled by Chicago Mercantile Exchange and Euronext.LIFFE that is based in London. Exchange traded derivatives are incessantly bought and sold in an exchange setting that is totally regulated and transparent. On the other hand, OTC exchanges takes place when trader prefer to trade directly with each other. Between both types of trade, there are two main differences Firstly, exchange traded contracts increases liquidity. Secondly, traders enter into a contract through the exchange clearing house which gives them a guarantee that the contract willing be adhered to. Over-the-counter trade do not have that lavishness because there is always the risk that one of the contractors will fail to honour the original agreement thereby going into liquidation (Reid, 2013, p .1). This paper will focus on the list of bank and companies making losings from using derivatives and what are the risks and benefits of different types of derivatives contracts. Bank and Companies Exposed to Losses There are some banks and companies which are exposed to losses due to derivative contracts. ... The fiscal disorder with its rigorous liquidity and recognition crunch seemed to detain to financial markets and institutions in the UK. It resulted in the failure of the key businesses, downturn in the economic action and reveals a quick drying up of liquidity following a huge expansion in credit issued to consumers and financial institutions. Metallgesellschaft AG engaged in a wide range of activities from engineering to trade and mining and financial services. The firm was exposed to large derivatives related losses at its U.S. oil subsidiary which is know as Metallgesellschaft Refining and Marketing. It had accounted a loss of $1 billion. Metallgesellschaft AG losses we re attributed to its wrong hedging program. lay on the line of Derivative Contracts Risks associated with derivatives are market risk, credit risk, counterparty credit risk, transparency risk, legal risk and basis risk. Counterparty Credit Risk It is the risk that a party to a derivative contract will be unable(p) to perform on its obligation. AIG tinted weakness in the supervision of counterparty risk and thus less clearable, OTC derivatives. AIGs counterparties had decided to only require collateral to breed counterparty risk of American International Group if AIG were downgraded. When American International Group did experience the difficulties simultaneous liquidity squeeze and collateral calls at AIG resulted in its last bail-out to evade systemic outcome. Posting to collateral either through upfront margins or mark-to-market margins is used to minimise counterparty risk to which they are exposed (Fsa, 2009, p.5). Transparency Risk The bankruptcy of Lehman Brothers tinted t hat positions and disclosure of firms in OTC derivative market were