Impact of Financial Derivatives on Macro Economic Variables

Abstract

Contracts using derivatives often lack the basic elements of contract theory. The derivatives' contingent character enables derivatives to be declared off-balance sheet; modeling-based derivative valuation is likewise a complicated process. Because of these flaws, derivatives have become a muddled financial instrument. The derivatives regulatory framework has a variety of problems, such as a large number of rules and regulators, which allows for regulatory arbitrage. Derivatives are undoubtedly a source of disruption in real-economy; inflation, high-scale speculation, interest rate and currency rate volatility, banking system and financial market instability, and so on, are all exacerbated when derivatives are present. In numerous economic meltdowns. Derivatives have also harmed corporations like hedge and Enron funds for example LTCM. Because of the enormous amount of derivatives trading, the Subprime Crisis became the Global Financial Crises of 2008. The dominance of derivatives trading has instilled enormous systemic risk in today's global financial system.