Development of Energy Derivatives in Risk Management Essay

Development of Energy Derivatives in Risk Management - Essay Example An off-shoot of this transfiguration is augmented market fluctuation which has resulted in an equivalent increase in demand for risk management products. This requirement is mirrored in the development of financial derivatives ranging from the harmonized futures and options products to the wide spectrum of over-the-counter or OTC products as offered. Financial risks may be construed as the risks to an organization which crop up as a result of price vacillations, either directly or indirectly, influencing the value of a company (Sprcic, 2007). A fusion of greater deregulation, international competition, interest rates, and foreign exchange rate fluctuation, along with commodity price suspensions, and hoisted corporate concerns, have resulted in increased significance of financial risk management in the years that trailed. ... interest rate confrontation, the way and limit of managing such risks has frequently witnessed a major role in the success or failure of a business. As a result, we can discuss that financial risk management is one of the most significant corporate operations for the reason that it contributes to the actualization of the primary target of the company, which is stock-holder wealth maximization (Sprcic, 2007). It is possible to conduct financial risk management in two unique manners. On one hand, the first approach can be the employment of a diversification approach in the assortment of businesses that are operated by the corporation. On the other hand, the second approach can be the corporation's involvement in financial transactions. In the case of such diversification, which has been one of the most prominent tools of risk management, firms which are basically concerned about the fluctuations of their earnings, have switched to the financial markets. This is solely because of the reason that the financial markets have embellished more straight approaches to risk management which excel the requirement to straightway invest in actions which help in the alleviation of instabilities. The errand of financial risk management has been provided by the increasing accessibility of an assortment of derivative implements in order to shift financial price risks to other worthy parties which are capa ble of benefiting from it. 2. Literature Review 2.1 Introduction to Derivatives Prior to the accurate development of derivatives markets, the