Derivatives as the world financial crisis factor

Abstract

This paper is focused on the analysis of derivative financial instruments as a factor that triggered the global financial crisis, which originated in the US (starting with ―the credit crunch‖ in the middle of 2007). It outlines results of the author‘s research study aimed to analyse complex derivative instruments – credit default swaps and collateralised debt obligations – and to provide ensuing recommendations on their application in future. As a result of the analysis, the author found out that main causes of the crisis are embedded in the structured derivatives market of the US, but it is a combination of factors that matters, comprising: creation of subprime mortgages and securitisation, lack of regulation in the use of collateralised debt obligations and credit-default swaps as off-balance sheet instruments, faults of ranking agencies, highly leveraged balance sheets of banks due to warehousing of ―toxic assets‖ and massive exposure to the instruments, overleveraging of world economies, multiple credit bubble collapses and mistakes of local economies, amongst others.