Domeheret al., (2015) stated that contemporary international markets have nurtured and fostered swift growth in derivative instruments. These instruments can be used by knowledgeable investors to profit from alterations in equity markets and interest rates across the world, alterations in currency exchange rates and changes in the global demand and supply situation for commodities, including agricultural products, energy products and precious and industrial metals (Gianiodiset al., 2014; Corsiet al., 2016). The addition of derivative instruments to traditional investment portfolios can help in global diversification in currencies and financial instruments, assist in hedging for deflation, and inflation and develop returns that are not connected with more traditional investments (Gianiodiset al., 2014; Corsiet al., 2016). Dash et al., (2014) stated that the use of derivative instruments can specifically help in the generation of benefits with specific regard to price discovery, risk management, the improvement of market efficiency for underlying assets and reduction of market transaction costs.
It nevertheless needs to be recognised that the occurrence of the global financial crisis underscored the limitations and risks of innovative financial instruments and reduced focus on its core economic benefits. This occurred because many innovative and complex financial instruments, especially collateralised debt obligations and credit default swaps were extensively used for pushing expansion of credit, which in turn triggered the crisis (Domeheret al., 2015; Kolb &Overdahl, 2009). Mortgage securitisation especially in the boom years did not assist in the reduction of the informational challenges that are associated with credit transactions and did not help in suitable risk assessment (Longsta&Rajan, 2008; Sun, 2008). The occurrence of the financial distress revealed the laxity in standards in the origination of securitised risks and the readiness of investors to assume substantially underestimated risks (Longsta&Rajan, 2008; Sun, 2008).
Arnaboldi and Rossignoli (2015) stated that the contraction in mortgage markets, which resulted in the recession of 2008-2009 was preceded by extensive usage of specific complex financial instruments, like collateralised debt obligations in the US and other nations. Corsiet al., (2016) however stated that derivatives transfer risks, rather than create them. Systemic crises take place when rapid expansion in credit and investment booms collapse because of non-fulfilment of expectations about future returns (Duffie& Zhu, 2011). The financial crisis revealed the loose standards in the origination of securitised credit and the readiness of institutions and funds to assume underestimated risks (Duffie& Zhu, 2011).
4. Discussion and Analysis
This section of the dissertation takes up the discussion and analysis of the findings of research in accordance with the aims and objectives of the study and the formulated research questions. The discussion and analysis has been carried out with regard to specific themes that are in accordance with aims, objectives and research questions.
Theme 1: Evolution of Innovative Financial Instruments
The examination carried out in the course of the literature review revealed that innovation was a continuous a
