Abstract

Derivative instruments, which originated for hedging purposes at the beginning, have gained further popularity with the usage of them as financial leverage. Rather than using them to hedge their portfolio risk, investors have begun to use these instruments for speculative purposes in huge amounts. In year 2007, derivatives despite their complexity and lack of transparency, have constituted the greatest portion of the bank assets especially the assets of investment banks. Moreover, since regulatory bodies are not authorized to regulate or to control usage of these instruments, the risk in banking sector has increased. This risk resulted in global financial crises with the inability of banks to deal with their liabilities.

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