Evaluating the effectiveness of using derivatives to hedge financial risks in the corporate sector

Abstract

In the context of the development of the global financial system, companies are faced with the need to effectively manage financial risks. One of the most commonly used instruments to minimize risks is derivative financial instruments, or derivatives. The purpose of this article is to assess the effectiveness of using derivatives in the corporate sector to hedge financial risks, including currency and interest rate risks. Both qualitative and quantitative research methods were used to analyze the effectiveness of the use of derivatives. In particular, the cases of large companies actively using derivatives for hedging, with a focus on currency and interest rate derivatives, were studied. The main financial indicators of organizations before and after the use of derivatives were compared with those without the use of such instruments. Econometric models have also been applied to assess the impact of derivatives on risk reduction. The study demonstrated that the use of derivatives for hedging allows companies to successfully reduce the impact of adverse market fluctuations on their financial results. The achievements in reducing currency and interest rate risks were most noticeable in large corporations with international activities. Comparative analysis has shown that companies that effectively use derivatives demonstrate more stable financial performance than those who prefer to avoid these instruments. Among the disadvantages of using derivatives, increased requirements for the competence of financial teams and the cost of using such tools correctly were identified. Despite the existing risks, derivatives remain one of the most effective methods of managing financial instability when used correctly. The use of derivatives to hedge financial risks in the corporate sector is an effective tool that allows companies to minimize the negative impact of market fluctuations on their activities, provided they are properly managed and monitored.