DERIVATIVES AS TOOLS FOR HEDGING CURRENCY AND INTEREST RATE RISK

Abstract

Derivatives have become essential financial instruments for hedging against various types of risk, particularly currency and interest rate risk. These financial contracts, such as futures, options, and swaps, allow businesses and financial institutions to mitigate the impact of adverse movements in exchange rates and interest rates. This paper examines the role of derivatives in hedging currency and interest rate risk, with a specific focus on their use in emerging markets such as Pakistan. Through a combination of theoretical analysis and empirical data from 2010 to 2024, the study explores how derivatives can help manage risk exposure, improve financial stability, and enhance business predictability. The findings suggest that while derivatives provide an effective risk management tool, they also introduce significant complexities, including counterparty risk, liquidity issues, and the need for robust regulatory frameworks. The paper concludes with policy recommendations to promote the responsible use of derivatives in Pakistan’s financial markets.