ASSESSING THE PERFORMANCE OF FINANCIAL DERIVATIVE INSTRUMENTS IN DIFFERENT ECONOMIC CONDITIONS

Povzetek

Financial derivative instruments are vital tools in the financial markets, offering a range of products like futures, options, swaps, and forwards. Assessing the performance of financial derivative instruments in different economic conditions faces challenges such as accurately modelling market volatility, quantifying the impact of macroeconomic factors on derivatives, and managing data limitations that may obscure risk exposure and hedge effectiveness. Assessing the performance of financial derivative instruments in different economic conditions within the banking industry and stock market involves evaluating how derivatives respond to market volatility, interest rate fluctuations, and economic downturns. This analysis helps banks and investors optimize hedging strategies, manage risk exposure, and enhance return on investment across varying economic cycles. The LBS dataset can be utilized in banking and stock market analysis to evaluate the performance of financial derivatives. It enables the examination of risk exposure and return on investment by analysing market trends, interest rate changes, and credit risks, providing insights into optimal hedging strategies and financial stability. Key parameters in evaluating financial derivatives include Return on Investment (ROI), Risk Exposure, and Hedge Effectiveness. ROI measures profitability, Risk Exposure assesses potential losses from market fluctuations, and Hedge Effectiveness evaluates the ability of derivatives to mitigate risks. Foreign exchange (FX) derivatives, such as currency forwards and options, are vital for hedging currency risks during economic instability and fluctuating exchange rates. Credit derivatives, including credit default swaps (CDS), help manage exposure to credit risk by protecting against defaults on loans or bonds, which is vital during downturns or financial crises. DCC-GARCH models evaluate financial derivatives by analysing dynamic correlations and volatility, allowing investors to assess performance under different economic conditions and optimize risk management strategies. Findings show that the Credit Default Swaps (CDS) provide limited risk mitigation at 75%, leading to weaker performance of just 5% during downturns and an average return on investment (ROI) of 6% implemented in Python Jupiter. Future research can explore innovative derivatives, enhance risk management strategies, and adapt instruments to evolving economic conditions and market dynamics.