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While China is currently moving toward the full development of its own financial derivatives markets, to date, China's experience with these has been a negative one. This paper examines the importance to China of developing a fully integrated financial derivatives market from both the economic and financial market perspectives. It examines the best way forward for derivative trading, both market based and over-the-counter, and the types of products best suited to both, given the current state of the Chinese financial markets. Consideration is given to market structure, regulation, trading and settlement systems and international cooperation.

The collapse of Italian economy has coincided with the global financial crisis to which derivatives are suspected to be responsible of its propagation. For this reason, this study aims to examine whether the use of derivatives affects the profitability of Italian banks during both the global financial crisis period and the recession period of Italian economy. To reach this goal an appropriate econometric procedure namely the dynamic Generalized Method of Moments system is applied using data from 22 Italian banks over the long period 2005–2017. A series of bank-specific indicators are used to explain the effect of overall derivatives and each derivative instrument separately on Italian banks’ profitability. The results of regressions panels indicate that in general derivatives as well as measured in the whole or splitting up in instruments specifically in forwards, options, and, in particular, swaps affect positively the profitability of Italian banks. The main conclusion is that – despite the episode of economic recession in Italy – Italian banks boost their profitability by using derivatives.

As practical contribution, policy-makers in Italy should throw out the assumption of the implication of derivatives in the fragility of the banking system. On the contrary, they should pave the way easily for Italian banks’ managers to deal with derivatives and look out for the real problems of the recent collapse of the Italian economy.

The 2007 BIS Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity Report shows a substantial increase in turnover in foreign exchange and OTC derivatives markets. Turnover in traditional FX markets increased to reach $3.2 trillion. The largest contributor to this 71% increase between April 2004 and April 2007 occurred in FX swaps. It was like a prelude to the financial crisis of 2007–2008 driven by transactions carried out between banks and other financial institutions due to the significance of hedge funds and major engagement of emerging market currencies which have sought new configurations of portfolio diversification worldwide.

The purpose of this chapter is to discuss the potential contribution of the option applications to economic instability. To this end, the chapter briefly reviews the extant literature on financial option pricing and its applications to corporate assets and liabilities. It focuses on the direct relationship between the volatility of the underlying asset and the value of the option. It shows that the theory of option applications by its one-sided emphasis on the value-creating role of volatility promotes excessive risk-taking. Then the chapter discusses how the theory of option applications through the educational system encourages economic agents to make excessively risky decisions. Furthermore, the interactions among these risk-welcoming agents lead to an economic system which becomes increasingly risky. This risky economy, combined with the fact that more than half of the value of the option applications is constituted by the highly volatile value of the options embedded in such applications, translates into wide variations in real investments and the economy.

This paper examines the role of structured products in the 2008–2009 financial crisis. The growth of asset securitization has allowed loans that used to be funded by traditional intermediaries, including commercial banks, to be funded in securities markets. As credit-related services became unbundled, layers of transactions were added to the financial intermediation process. These layers were added as structured products, e.g., credit default swaps, in the over-the-counter market. This paper looks at the evolution of credit markets and the importance of using off-balance-sheet-based measures as an alternative in assessing the financial sector.

In terms of notional value outstanding, derivatives markets declined in both over-the-counter and exchange-traded transactions during the 2007–2009 global financial crisis (GFC) period, as counterparty and credit concerns became pre-eminent. However, during the 2010–2011 second stage of the GFC, markets rebounded and by June 2011 outstandings reached new levels which highlight the importance these contracts continue to play in the day-to-day risk management and trading activities of corporations and financial intermediaries. The bulk of the contracts traded are interest rate-related instruments and are denominated in either US dollars or Euro. Credit-related instruments remain an important market segment, although outstandings remain at pre-crisis period levels. Of particular concern for regulators is the role of non-bank financial intermediaries, which are the main counterparty to derivatives transactions. While their share of the market remains unchanged over the last decade, outstandings overall have increased more than fourfold. The present volume considers the issues that participants face in today's derivatives markets including the potential impact of derivatives on economic stability, pricing issues, modelling as well as model performance and the application of derivatives for risk management and corporate control.