Analysis of Selected Risks in the Futures and Options Markets and Their Management Strategies (2024)

Zheyuan Zhang ^{* 1}

¹ Management School, Queen’s University Belfast, Belfast, Northern Ireland, United Kingdom, BT7 1NN

This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

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Abstract

The 2008 global financial crisis had profound impacts on the world’s financial system. Countries around the world intensified their regulation of financial markets, especially the derivatives market. This paper explores some financial risks, non-financial risks and risk management strategies in the futures and options markets through literature analysis, aiming to help market participants manage and reduce potential losses. These risks include liquidity, credit, market, operational, model, and Herstatt risks. This paper finds that although there are many risks in the futures and options markets, investors can still pursue profits and manage these risks effectively at the same time by applying some appropriate risk management strategies, such as hedging, using appropriate models, and utilizing real-time settlement systems. These strategies are significant for improving market stability and investor protection. Additionally, this paper emphasizes the importance of providing education for market participants and global regulatory cooperation to further maintain market integrity.

Keywords

option market, future market, risk management, financial risk, non-financial risk

References

1. Kyle,A.S. (1985). Continuous Auctions and Insider Trading. Econometrica, 53(6), 1315-1335.

2. Hull, J.C. (2018). Options, Futures, and Other Derivatives.

3. Black, F.& Scholes, M. (1973). The Pricing of Options and Corporate Liabilities. Journal of Political Economy, 81(3), 637-654.

4. Jorion, P. (2006). Value at Risk: The New Benchmark for Managing Financial Risk. McGraw-Hill.

5. Basel Committee on Banking Supervision. (2011). Operation Risk-Supervisory Guidelines for the Advanced Measurement Approaches. Bank for International Settlements.

6. Derman, E. (1996). Model Risk. Quantitative Strategies Research Notes, Goldman Sachs.

7. Zimmerman, P.A. (1980). The Settlement of Payments in Financial Center: The Central Bank’s Role. Federal Reserve Bank of New York Quarterly Review, 5(2), 16-24.

8. Duffie, D., & Zhu, H. (2011). Does a Central Clearing Counterparty Ruduce Counterparty Risk? The Review of Asset Pricing Studies, 1(1), 74-95.

9. Angelini, P. (1998). An analysis of competitive externalities in gross settlement systems. Journal of Banking & Finance, 22(1), 1-18.

Data Availability

The datasets used and/or analyzed during the current study will be available from the authors upon reasonable request.

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Volume Title

Proceedings of the 2nd International Conference on Financial Technology and Business Analysis

ISBN (Print)

978-1-83558-147-6

ISBN (Online)

978-1-83558-148-3

Published Date

01 December 2023

Series

Advances in Economics, Management and Political Sciences

ISSN (Print)

2754-1169

ISSN (Online)

2754-1177

DOI

10.54254/2754-1169/50/20230573

Copyright

© 2023 The Author(s)

Open Access

This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited