Pros & cons of Derivatives Markets

If you are interested in pursuing a career in finance, then you may have come across the term derivatives market. And, for anyone wanting to become a certified investment banking operations professional, learning about derivatives markets is essential. So, let’s dive into the definition of derivatives, what advantages and disadvantages they offer, and also, what is investment banking and how is it related to them. Read on...

What are derivatives?

Derivatives refer to financial contracts whose value is associated with the value of an underlying asset. You can use these advanced financial instruments for many purposes such as getting access to markets and hedging. Except for a few derivatives such as futures and options that are traded on specific exchanges, most of them are traded over the counter, also known as OTC. 

Some of the most prominent derivatives markets are Korea Exchange, CME Group (Chicago Mercantile Exchange and Chicago Board of Trade), and Eurex. 

Notably, derivatives have been in the finance industry since their inception. Over time, they have become an integral part of modern markets. However, you should not confuse the derivatives market with a capital market. In a capital market, the primary securities you trade are stocks and bonds while in a derivatives market you trade futures and options. 

Pros of derivatives markets

Some pros of derivatives markets are:

• A derivatives market allows you to hedge risk exposure. For example, you can buy a derivative contract whose value goes in the opposite direction to the value of an asset you own. It would help you offset the losses. 
• You can use derivatives to find the price of the underlying asset.
• Derivatives enhance the efficiency of financial markets. You can mimic the payoff of the assets by using the relevant derivative contracts.

Cons of derivatives markets

There are some cons of derivatives markets too. And, they are:

• Derivatives are highly volatile and might expose you to huge losses. 
• Many experts regard them as tools of speculation because of their unpredictable behavior. 
• Even with due diligence, some OTC derivative contracts do not have a benchmark for due diligence, increasing the risk of counterparty default. 

Learn more about finance

Companies are constantly on the lookout for experts who can analyze the markets and strategize their investments accordingly. Risk management in banking and investment banking allows companies to find potential growth opportunities in the markets. 

If finance is your career choice, then you must learn what investment banking and risk management in banking are along with other concepts. And, the best way to go about this is to take up an investment banking course. Pursuing a well-structured investment banking course will familiarize you with the basic and advanced concepts of finance. It will provide you with a structured curriculum so you can plan your studies properly. 

Besides, an investment banker course would certify you as an expert, making it easier for you to stand out as a professional. Recruiters in the finance sector use certifications to find serious and highly skilled candidates, hence, it would accelerate your career growth substantially. 

By and large, derivatives markets are significantly important and form an integral part of modern finance. And, investment bankers help companies in analyzing these markets and determine their future plans. If you are interested in entering this sector as a professional, then you should complete an investment banker course. It will help you learn the necessary subjects while getting certified as an expert. You can check out our investment banking course details here.