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The Importance of Derivatives in Risk Management 

August 18, 2015

Daniyal Rehman, The Market Mogul

Banks, brokers, portfolio managers and even the entire financial industry are exposed to risks on a daily basis. Due to this and especially since the financial crisis, the importance of risk management has increased rapidly. The fundamentals of risk management are not to completely eliminate risks, but to manage them accordingly. As financial markets grow, there is an increasing need to manage risks appropriately. The solution lies within the use of financial derivatives. This article looks at why derivatives are so vital when it comes to managing all kinds of risks.

What is financial risk & risk management?

In finance, the definition of risk is endless. Risk can be viewed as the chance of a client or government defaulting on its bonds or even the possibility of a financial loss from an investment. Overall, financial risk involves combining both uncertainty and benefits of outcomes. Risk can be measured through statistical methods such as the standard deviation, beta and correlation coefficient. Another important measure is that of Greeks, which are denoted mathematically by Delta, Gamma, Vega and Theta.

Read more: The Market Mogul

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