By Samir Al Khoury

The global financial markets, i.e. the stocks, bonds, commodity, currencies and crypto markets, are witnessing, at this stage, sharp fluctuations due to several factors, including:

·        Geopolitical tensions in the Middle East and the Red Sea, in addition to the continuation of the Russian-Ukrainian war that broke out two years ago.

·        Uncertainty about the path of inflation and interest rates by most central banks, especially by the US Federal Reserve, the European Central Bank, and the Bank of England.

·        Uncertainty regarding global economic growth this year.

As a result of all the above, most investors, both individuals and institutions, take these risks into consideration to protect their investment portfolios from potential losses.

What type of financial market do investors resort to protect their investments from potential losses?

Financial derivatives contracts are one of the most important tools used by investors to hedge or reduce risks resulting from fluctuations in the prices of financial instruments.

But what are financial derivatives?

Financial derivatives are financial instruments that derive their price from another financial asset such as commodities, stocks, currencies, stock indices, etc.

Risk management is one of the most important benefits of financial derivatives if used correctly.

The most prominent types of financial derivatives are options contracts, futures contracts, forward contracts, swap contracts, and contracts for differences.

Options contracts are contracts that give the buyer the right but not the obligation to buy (call) or sell (put) a particular underlying asset at a predetermined price at the end of a specified future time.

An option is also a contract that gives the seller a commitment to sell or buy a specific underlying asset from or to the buyer at a specific price and time. In exchange for this commitment, the buyer pays the seller an upfront amount known as the premium or option contract value.

There are two types of options: Call and Put

What is the importance of financial derivatives?

The demand for financial derivatives contracts increases significantly in light of the volatility and uncertainty in the financial markets, and this is what is happening at this stage. If investors have an investment portfolio, they have three options:

1.They can sell the entire portfolio and exit the market.

2.They can retain the portfolio and consequently face an increase in risk.

3.They can retain the portfolio and use financial derivatives as a means of hedging and protecting their investments.

According to CME Group, the financial derivatives market has grown at a record rate in the Middle East and North Africa, supported by a combination of factors including interest rate increases and ongoing geopolitical tensions. The Middle East and North Africa region is classified among 10 financial derivatives markets.

Please note that this analysis is provided for informational purposes only and should not be considered as investment advice.

Taurex is the trading name of Zenfinex Global Limited, Stochastic Africa SL Ltd, Zenfinex Global LLC, and Zenfinex Limited.

Zenfinex Global Limited is registered in the Republic of Seychelles with registration number: 8428731-1 and is regulated by the Financial Services Authority of Seychelles (license number SD092). Its registered office address is F20, 1st Floor, Eden Plaza, Eden Island, Seychelles.

Stochastic Africa (SL) Limited is a company registered in Sierra Leone with Company Number: SL270319STOCH05271 and is licensed by the Bank of Sierra Leone under license number BSL/SAL/2023 and with the registered office at 148D Wilkinson Road, Freetown, Sierra Leone.

Zenfinex Global LLC is a company registered with the Financial Services Authority in Saint Vincent and the Grenadines under registered number 138 LLC 2019. Its registered office is Hinds Building, Kingstown, Saint Vincent, and the Grenadines.

Zenfinex Limited is a company registered in England and Wales under registered number: 11077380. Authorised and regulated by the Financial Conduct Authority under firm reference number 816055. Its registered office is 4th Floor, 4 Eastcheap, London, EC3M 1AE, United Kingdom.

*All trading involves risk