Who uses derivatives and why?

Thousands of companies around the world use derivatives to reduce their business risks and increase their customers’ confidence.

On June 19, 2020, the Verkhovna Rada of Ukraine adopted the Law on Amendments to Certain Legislative Acts of Ukraine Concerning Simplification of Attracting Investments and Introduction of New Financial Instruments №738-IX, which provides for the introduction of derivative contracts in the Ukrainian financial market.

Now we bring to your attention a new animated video of the International Swaps and Derivatives Association (ISDA), which presents how derivatives are used by many types of companies around the world.

Mortgage operators, for example, use derivatives to offer home buyers a choice of fixed-rate or floating-rate mortgages.

Banks also use derivatives to manage the risks of their loans, allowing them to borrow more.

Pension funds and asset managers use derivatives to help optimize and protect the value of pension parts and investments, allowing people to plan for the future with greater certainty.

Commodity producers also use derivatives.  When they want to raise money for new investments, they can use an interest rate swap to record financing costs, thereby reducing the impact of a potential increase in interest rates.

Food and beverage companies use derivatives to manage the risk of price fluctuations in their ingredients. This helps to ensure the stability of the offer and price of the buyer’s favorite food.

The same applies to energy prices. Manufacturers and suppliers use derivatives to help smooth out the regular ups and downs in gas, oil and electricity prices, reducing instability for consumers.

Similarly, airlines use derivatives to record fuel costs, which helps mitigate the indirect impact («domino effect”) on ticket prices.

The ability to build confidence and stability is extremely valuable and vital to global economic growth.

Source: ISDA