Development Of Financial Derivatives

In the recent two decades, the most compelling change in the global financial market has been the rise and development of financial derivative market. In combination with its broad applications, the fast spread of financial derivatives pushed the financial deepening, which appeared in 1970, to a climax that profoundly impacted the financial market as a whole. By deepening the liberalization and globalization of financial market, how to accelerate the development of the local financial derivative market, to internationalize its financial system and to strengthen the role of financial deepening to its economic growth become the most imminent tasks facing China.This paper studies on the role financial derivative market played on the financial market and the macro economic growth, gains knowledge from the successful experiences of western countries and emerging economies. The purpose of the present study is to propose rules and measures on how to foster and strengthen a financial derivative market in China under the current market situation, which is of great practical significance to deepening China's international financial involvement, to improve the financial competitiveness and to ensure the financial safety in China.In the first place, the paper introduces the general concept of financial derivatives. Reveal the driving force of the development of financial derivative market by a review of its history. On one hand, the increasing market risk fostered by the financial globalization stimulating the demand for risk management and also the fierce competition among banks stimulating the increasing supply for financial derivatives, which are the main intrinsic reasons of the rapid development of financial derivative market; on the other hand, the technological progress in communication and net work, the launch of the pricing theory, which lower the trading cost and promote the trading efficiency, become the external factors to facilitate the development of financial derivative market. Then, based on the latest statistics, the paper discusses the current status and future development trend of global financial derivative markets, focusing on the respects of the trading scales, the product types, the geography breakdown, the cross-border merging of the Exchange and the rise of financial derivatives markets in emerging economies.Although the financial derivative market has the positive effect on risk transfer, a series of market turmoil and financial risks caused by the financial derivatives impede the financial derivative market development in China. In light of the theory of financial deepening, this paper analyzes the mutual impetus between development of financial derivative market and financial deepening. Taken the development of financial derivative market in India for example, using empirical analysis with Granger Causality test and correlation analysis, the paper concludes that financial deepening is the factor accelerating the economy growth, high correlations are among the development of financial derivative market, financial deepening and the economy growth. The positive roles the development of financial derivative market played on financial deepening, improving the financial market and accelerating the economy growth are fully recognized by studies on the impacts which financial derivative market makes to the financial market.Subsequently, the paper compares the rules of how western countries and emerging economies developed their financial market, summarizes the experiences of the development patterns of spontaneous development and government initiatives. Based not only on an in-depth understanding of internal and external financial conditions in China but also from its previously failed experiences, the paper points out that an institutional framework conductive to China's financial derivative market development is preliminarily established, however, the market has grown slowly with a unitary variety of derivative products and lack of trading volume. At the same time, the financial derivatives with the concept of China introduced by foreign institutions and the rapid growth of financial derivative market in emerging economies in Asia and Latin American are the severe challenges facing China, which will have adverse effects as the loss of domestic financial resources, vying for the international financial resources, erosion of the financial competitiveness. Thus, the paper proposes rules and measures on how to foster and strengthen a financial derivative market in China. In the choice of variety, stock index futures is a good breakthrough, then give the priority to the bond futures due to the relatively sound fundamental market. The launch of foreign exchange derivative products should be under the maturity of currency market liberalization. And the credit derivatives with potential supplies and demands also can be taken into consideration. In respect of the market infrastructure, financial supervision is given a priority. On this basis, more efforts shall be devoted to cultivating the nurturing market participant and training employees in financial derivative professions.