Companies and Derivates as a Tool to Hedge Their Risk

In main part of this paper we describe and analyze some conclusions of previous studies regarding derivative instruments throughout the whole world. We attend more closely to the scale of derivatives utilization, types of derivatives used, risks hedged by these instruments and the main determinants influencing usage of derivatives. Furthermore, we discuss reasons for non-usage of financial derivatives among companies. Past and present state of derivative market in Slovakia is also analyzed. The emphasis of this paper lies on analysis and reasoning of results that have emerged from our primary research in UK and secondary research in Slovakia. Stronger competition among companies has arisen under globalization processes. New companies from emerging economies are also entering global markets. These are only some of number of reasons which make global business environment more risky and difficult to survive in. Hence the need for effective protection against risk or in other words hedging. Derivatives are definitely important area for companies to consider when coping with various risks. Caution should be applied when using derivatives due to the fact that it is very easy to deviate of the main purpose (hedging) and slip into speculation which might deteriorate company’s position on the market. Risk management is nowadays inevitable part of every successful company and derivative instruments only contribute to further sharpen teeth of any risk manager. Main obstacles faced when attempting to conduct pertinent and statistically valid academic research in regards to financial derivatives in Slovak Republic is mainly insufficiently developed capital market which directly results from lack of liquidity and functionality, lack of investors, few initial public offerings, lack of trust of retail investors towards mutual investing and last but not least need to harmonize Slovak financial legislation with legislation of European Union.