Describing The Various Aspects Of Derivative Failures (Research Paper Sample)

Derivative Failures
Student’s Name
Institutional Affiliation
Derivative Failures
Introduction
The derivative can be referred to something that exists in terms of a security, or rather a contract that acquires value from its association with the stream that involves cash flows or the other assets (Colander et al, 2009). There exist various examples of derivatives that are good or bad and they are used as speculative tools or things that can be productive. In addition, the derivatives help in ensuring the stability of a certain country economy. At the same time they can cause the fall of the economy in case it does not identify the risks and hence does not help organizations protect against them. This paper outlines the derivative failure that was experienced in the United States and caused a financial crisis 2007-2009, hence the period was also referred to as the period of great depression. There existed four derivative failures that caused the various implications of the financial crisis within the nation as outlined in this paper.
Financial Implications
To begin with, the government mispriced the guarantees hence putting the financial sector at a risk. In addition, the firms paid concern regarding the risks experienced in the individual institution instead of focusing on the systematic risks experienced in the individual firms. It is evident that the opacity positions existing in the financial derivatives caused the externalities, and there also existed the runs on the banking sector which was unregulated hence threatened to cause the fall of the whole financial sector (Omarova, 2008). Other ways in which the institutions obtained the derivative position is by taking the roles of establishing the contracts with the clients to earn fees, and the speculators in the derivative situations aimed to acquire profit. During the great depression, the commercial banks also acquired derivatives as dealers or as hedges where most of them used the interest rates for the contracts which later failed.
The derivative failure has been used to give an illustration on the failure of the market-driven strategies when viewing the state of the economy. Viewing the failure in the market-driven perspective, the liberalization of the markets, removal of the regulatory restrictions, and the state where the market trusts are unintended contributed to the destabilization of the financial segment. For this reason, derivative failure caused shock in the macroeconomic sector and at the same time the banks at the nationwide incurred losses. This influenced the individual perception about the banks hence there were the massive runs due to the insolvency that prevailed. Various investors from the New York City were scared due to the great depression. The banks in the United States experienced pressure hence it contributed to the closure of some financial institutions.
Impacts on the Organization
The derivative failure impacted various financial institutions and broadly impacted the banks and the state of the economy in the nation. The institutions had insufficient funds when depositors claimed their money. However, the organizations had to reduce the prices of their products and services. The unemployment rates increased within the nations due to the closure of some institutions (Moser, 2013). In fact the borrowers from the organizations were not in the position to make payments due to the state that prevailed in the banks and other financial institutions. Notably, the institutions lacked ways to cater for the needs of the depositors and hence the public lacked confidence in the remaining banks. It was not easy for the consumers to assess the risks that existed within the institutions.
Cause of the Failure
The derivative failure was caused by recession hence the money shrank influencing the economic state. The historians in the economy and the economists split to search for a better explanation on the occurrence of the derivative failure which contributed to the great recession. There was a failure in the autonomous spending particularly regarding the investments hence set the occurrence of the problem.
Value of the Loss
Due to the failure in the stock prices, the worldwide Gross Domestic Product declined by 15% (Ohanian, 2009). Significantly, the rich and the poor individuals experienced the devastating effects including the financial institutions and the banks. The individual incomes, profits, the prices of the products and the tax revenue declined with 50% estimates (Ohanian, 2009). The United States unemployment increased to 25% and in the other countries it increased to 33%.the stock market experienced 3o% losses and...