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The Implications of Financial Innovation and Derivatives on the Global Financial System Free essay! Download now

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The Implications of Financial Innovation and Derivatives on the Global Financial System

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what is the implication of financial innovation


The Implications of Financial Innovation and Derivatives on the Global Financial System

The global market in the past decade has not only witnessed but also experienced important changes due to the great numbers of important innovations introduced in its financial system (STULZ, 2003). First, financial innovation may be defined as the process through which an existing instrument is produced and improved upon to take on a new format or the introduction of a totally new financial instrument on the global market. An example of the financial innovations in the financial system of the global market are derivatives, transfer products, risks, traded funds and so many others as noticed in the global market. Financial innovation process also involves changes in the institutions, markets around the globe and likewise the financial practices which were originally employed.
It is therefore noted that it is due to the changes experienced during the process of innovation that financial innovation has an influence on the way risk is managed in the market, the global financial markets and the economy of the world as a whole. This paper therefore discusses the different implications that the various financial innovations and derivatives have on the financial systems in the global market and a lot of emphasis is put on the way these innovations do spread risks on a wide range (HULL, 2006). This is because the global financial systems experienced dramatic growth in the method they transferred and managed risk, the growing involvement of non-banking financial institutions and their contributions in capital markets around the globe. This was especially noticed in the hedge funds, which were able to bear risks in their security markets and the market at large. To a greater extent, financial innovations were able to integrate national financial systems and it was because of the new changes that the financial system is now able to handle shock on a broader level although it is hard to fully eliminate risks.
These are due to the introduction and improvements made in financial instruments as discussed above. Financial innovations are created in the global financial systems because of the need to acquire higher profits by the market participants and hence they continuously search for new models to adopt to achieve their goals. Through financial innovations, new modes of derivatives are created. Derivatives therefore take the following form, credit, weather, contracts especially insurance, and securities of corporate bodies, products, processes and prices of transactions. It has been noticed that the cost of computers and their related communication technologies have acted as driving forces which influenced financial innovations within the global financial system (GEITHNER, 2006).
The increased advancement in the financial theory did boost the desire for institutions to introduce new ...

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