Role of derivatives in financial crisis

Financial crisis is a situation that may affect various forms of lifestyle and every economy across the world. The basic aspect of financial crisis revolves around the fact that, most of the entities over the world are in some way or the other interdependent among themselves. Thus, if any particular sector was to be affected, the impact would disperse among all others. In recent times the popularity of using derivatives in the financial market had come up greatly, as there was no need to transfer the original subject among the entities.

By the use of the derivatives, we could pretty easily take risks against various ventures hoping to make profit out of them. People started to take loans on the basis of derivatives considering the fact that it would be greater profit for them. On the other hand the individuals lending out on derivatives thought of gaining from the derivatives in case they were able to pull out a foreclosure. Thus, the entire transaction was based on the simple probability of events, which could have possibly taken place, for the both the entities.

However, in the long run we could see that because of these derivatives, the financial market has had a huge los and the crisis situation is continually deteriorating. Basically the mortgage loans that are provided by the banks are on the basis of derivatives, which can be evaluated before hand. Individuals have been given out loans and considering the derivative value in hand heavy investments were made. As soon as the market started to collapse, it was certain that the value of the derivatives would come down, but the banks did not pay heed to that.

According to the banks, if they would have held onto the derivatives for a longer time, there would be a chance for them to sell out the asset after the prices have come up. Instead of coming up the prices dipped so low that the banks could not even think of selling the derivatives over, as the marked value they would receive against it was equivalent to nothing. This major financial crisis has further been fueled due to the several fraud cases that have occurred relate to the mortgage loans, leading to the depreciation of the prices of real estates.

The role of derivatives in financial crisis can be well interpreted, if we were to consider the facts in details. Every thing that happened after the banks started collapsing one after the other is known to the general mass. The entire economy, which was greatly aided and bonded with some of the most influential banks and organizations of America, came to a standstill, as they began to crumble down. The impact has also affected the manufacturing, retail and several other industries, along with the fluctuation of tax and inflation rates.
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