The review furthermore revealed that the use of innovative financial instruments can help in the enhancement of sustainability of public investment, the incorporation of private sector participation and the sharing of various types of risks (McNeil et al., 2005). It however needs to be recognised that the use of innovative financial instruments is associated with various types of risks that have to be identified, managed and controlled for the enhancement of their various benefits (Chavaet al., 2013; Altman et al., 2005). These risks are of various types and include market risks, interest rate risks, currency risks, liquidity risks, economic risks, country risks, legal risks inflation risks, counterparty risks and settlement risks (Cherotichet al., 2015). Users of financial instruments must recognise and be aware of these risks in order to maximise the benefits of their usage (Crouhyet al., 2001; Cherotichet al., 2015).
Theme 3: Role of Financial Instruments in the Contemporary Global Economy
The research carried out for this project revealed that the growth in usage of innovative financial instruments has increased worldwide on account of their diverse benefits (Laevenet al., 2015; Schueffel&Vadana, 2015). Whilst millions of people make use of these instruments for purposes of savings and investments, they are also used for purposes of speculation, as well as the management and mitigation of various types of financial risks (Schnbucher, 2003; Yu, 2007). Derivative instruments are used extensively in contemporary environment by knowledgeable investors for achievement of profits, investment portfolio diversification and the generation of benefits, especially in cases of price discovery, risk management and enhancement of market efficiency (Gianiodiset al., 2014).
It however needs to be recognised that the misuse of some financial instruments, especially asset backed securities, including collateralised debt obligations by managers of banks and financial institutions contributed to the triggering of the financial crisis of 2007-2009 (Domeheret al., 2015). Whilst the financial crisis was driven and aggravated by a number of factors, there is considerable agreement that better use of new and innovative financial instruments could have helped considerably in the prevention of the onset and development of the financial crisis (Corsiet al., 2016). There is however little doubt that the use of innovative financial instruments will continue to grow across the world in the coming years and that substantially greater care will be taken in their usage by various people, especially regulators and bankers, to prevent a recurrence of the crisis.
5. Conclusions
5.1. Conclusions
This research study engaged in the examination and assessment of various aspects of innovative financial instruments in order to develop and generate a comprehensive understanding of the subject. The research for this study was carried out with the help of library based techniques and the conduct of a detailed literature review of various information sources that were identified with the help of keyword based online search. The information obtained in the literature
