THE ROLE OF FINANCIAL DERIVATIVES IN FINANCIAL RISKS MANAGEMENT

Financial derivatives are financial instruments whose price is derived from the basic financial instruments' prices. They represent derivative financial instruments created based on the existence of primary instruments, such as shares, bonds, stock market indices, or other forms of assets. It is precisely the benefit of using derivatives that point to their basic function. The primary function refers to risk protection and reduction of exposure to some instruments, markets, currencies, countries, regions, and others. In this case, we are talking about derivatives for hedging investments or currency positions. Those positions are taken on financial markets in specific instruments or currencies. Likewise, exposure to certain entities that issue financial instruments can be replaced or reduced to reasonable or prescribed measures by using derivatives. Derivatives offer a significant advantage: risks are transferred when they are used. Market and price risks of the underlying asset are contractually transferred to the financial derivative through the contract design. Of course, derivative financial instruments also have disadvantages. For example, there is a risk of total loss for some. The research subject in this paper is the role of financial derivatives, derived financial instruments, and their role in financial risk management. In this paper, the author emphasizes the basic types and characteristics of financial derivatives, their benefits, and the risks market participants may face if they use the derivates.