The internationalization of financial markets has exposed financial institutions to stiffer competition from foreign firms and to levels and types of risks not present in the recent past. The high technique of financial skill, financial derivatives are useful for financial institutions to struggle for existence in infinite competition. Particularly, the OTC options is very useful to control the risks of the financial institutions.
As other derivatives, OTC derivatives pose multi-dimensional risks. This thesis studies the risks incurred by financial institutions that use OTC derivatives and also suggests several ways to control these risks. This thesis applies basic option pricing models to two real cases. we could find out some points to be considered in the transaction of OTC options by studying cases. For example, it should be checked out if the option premium is fair or not or if the transaction is legal or not.
Given the complexities of the derivatives strategies and the dynamic nature of market, determination of the appropriate type and level of regulation is difficult. Considerations includes : maintenance of the stability of the financial market, impact on the ability of financial institutions to manage their risk in an effective and efficient manner, and the level of statutory reporting necessary to provide appropriate information to investors.
