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Research and Examples on the Application of Financial Derivatives in Risk Avoidance
- 1 University of California- Santa Barbara
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Abstract
The fragility of the global financial system, exposed during the 2008 financial crisis, highlighted the challenges posed by the complexity and opacity of the derivatives market. This research examines the application of financial derivatives in risk management, focusing on their role in mitigating risks through the case of JPMorgan Chase during the crisis. The paper focuses on the types and functions of financial derivatives, especially the use of credit default swaps (CDS) and interest rate swaps (IRS) and their risk management applications in financial institutions. Data sources include JPMorgan Chase's public annual report, financial report and related news reports. The results show that JPMorgan Chase has reduced some subprime risk exposure and successfully avoided potential losses of about US$5 billion through the effective use of financial derivatives. However, the use of derivatives also exposes problems such as market liquidity and counterparty risk, reminding financial institutions to carefully manage related risks when using derivatives. In conclusion, while derivatives can be powerful risk management tools, their over-reliance may introduce new systemic risks.
Keywords
Financial derivatives, risk management, JPMorgan Chase, credit default swaps, hedging
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Cite this article
Chien,W. (2025). Research and Examples on the Application of Financial Derivatives in Risk Avoidance. Advances in Economics, Management and Political Sciences,164,56-61.
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