Legal Aspects of Derivatives

Derivative products are being very widely used in the present age to hedge against corporate business risks and many of the world’s largest companies use these products. Some of the business risks for which derivatives may be used include exchange rate or interest rate fluctuations, commodity and equity prices as well as the risks associated with lending. Swaps are contractual agreements between two parties usually made under a specified law which require both the parties to exchange cash flows based on interest rates, exchange rates or the prices of indexes. Equity swaps involve exchanging cash flows based on rates of return of a stock market index or two stock market indexes. Equity index swaps are used by institutions to gain exposure to stock markets where governments have created high entry costs. In this essay, the legal issues associated with derivatives are examined.