Accounting for the level of success of firms in achieving their objectives for using derivatives

Abstract

Derivatives can be viewed as a socially constructed and need-driven innovation in the financial economy, with their roots well ingrained in the events and circumstances of the real economy (Sharma, 2008). As the transition from a production-based economy to a financial economy was taking shape during the late 1960s and 1970s, the need to control highly increased volatility and fluctuations due to inflation problems, currency problems, debt defaults and many other factors increased in importance (Fischer, 1993). The increased need for controls such as regulation, risk management and audits is noted in literature as being the main reason for the increased global use of derivatives (Brenner, 2002). However, despite the fact that the trade of derivative products have mushroomed (Bank for International Settlements Quarterly Review, March 2010), derivative contracts have tended to make the headlines only when firms and financial institutions made spectacular financial losses (Hull, 2008).