Briefly discuss the Interest rates determinants and how interest rates affects Derivatives with Empirical evidence? How are Derivatives used for Risk Management purposes?

Determinant of interest rates are as follows-

A. Demand and supply between various buyers and lenders will be one of the most important aspect of deriving of the interest rates.

B. Supply and demand of the low-level funds and excess savings in the hands of the household are one of the most important determinant factor of interest rate.

C. Interest rate is also based upon various types of personal factors such as creditworthiness of the individual and loan size and length of term of the individual.

D. Interest rates is also based upon the cycles in the economy as well as the policies which are considered by the central bank such as monetary or contractionary policies.

E. Interest rates are also based upon the rate of inflation which is existing in the economy.

Interest rates are affecting derivatives because interest rates will be always increasing the value of the options because when the interest rate will increase the call option price increase whereas, the put option price will be decreasing and Hence, it will mean that when the interest rates are higher the income will also be higher for the individuals in the derivatives market.

Derivatives are used for Risk Management purposes by taking position in the opposite direction of the existing exposure of an individual, so it will be trying to eliminate the risk associated with a particular position by taking extra position in the other side, so that it will be used for hedging, and it will also help the individual in order to eliminate the risk associated with high volatility in the market at secure the rate of return and it can be used through call option and put option, future contract, forward contract, interest rate swaps.