Financial derivatives are financial investment tools, which can not only provide people with investment and financing opportunities, but also be used to eliminate risks and hedge. They are indispensable financial instruments in today's financial market.

In fact, financial derivatives came into being in the 1970s to deal with the exchange rate risk brought by the floating exchange rate system after the collapse of the Bretton Woods institutions and to break through the restrictions of mixed operation in the United States.

Disadvantages:

Financial derivatives are generally leverage tools, that is, large-scale investment and financing operations are carried out with less funds. Financial derivatives are generally more complicated and beyond the understanding of professionals, which undoubtedly increases the overall risk of financial markets and the possibility of financial crisis.

The subprime mortgage crisis in the United States in 2007 was due to the excessive use of leverage tools, which involved too many large financial institutions. The interruption of capital flow made most companies not have enough cash to deal with the run, which led to the credit crisis and bankruptcy.

Extended data:

Tool classification

Financial derivatives can be classified according to the types of basic instruments, risk-return characteristics and their own trading methods.

(1) According to product classification, financial derivatives can be divided into independent derivatives and embedded derivatives.

(2) According to the classification of trading places, financial derivatives can be divided into OTC derivatives and OTC derivatives.

(3) According to the classification of basic instruments, financial derivatives can be divided into equity derivatives, currency derivatives, interest rate derivatives, credit derivatives and other derivatives.

(4) Financial derivatives can be divided into financial forward contracts, financial futures, financial options, financial swaps and structured financial derivatives according to their own trading methods and characteristics.

In fact, two methods are usually used to classify derivatives.

(1) According to product types, financial derivatives can be divided into four types: forward, futures, options and swaps.

(2) According to the nature of the original assets of derivatives, financial derivatives can be divided into stocks, interest rates, exchange rates and commodities.

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