Derivative contracts as alternative mean of the risk transfer


The main goal of this article is to point out the follovving: the circle of subjects who use alternative ways of risk protection, their reasons for doing it, the function mechanisms of derivative contracts as alternative ways of risk transfer and advantages and disadvantages of derivative contracts compared to insurance contract, as traditional method of protection.

The greatest users of alternative methods of risk transfer are big industrial subject (corporation, banks, insurance companies). There are many reasons why they do that: insufficient insurance capacity; some risks could not be covered by insurance (market risks change of customers’ interests, price risk); escaping interest rate risk, currency risk, liquidity; better portfolio structure; balance between invested funds and commitments etc.

The author gives definitions of options, futures and swaps, explains and analizies functions of catastrophe options, futures and swaps. For better understanding, the author cites examples for each of these derivative contracts.

The text shows similarities and differences between derivative contracts and insurance contracts. The fact that optimal combination of methods of protection cannot be the same for all insurers is emphasized, because there might be many differences amnog them. Emphasis is that optimal combination of protection methods could not be same for all insurers because they have large differencies. Every decision requires detailed analysis of advantages and drawbacks of such method of protection and the use of mathematical methods in order to get to the most profitable, efficient and cheapest method of protection.

Derivative contracts should be seen as a supplement to traditional ways of protection and they cannot replace insurance as traditional method of risk protection.