An analysis of China’s derivatives market and accounting for derivatives

The world recently witnessed the growing use of derivative instruments and the rapid expansion of derivatives markets. The literature has identified price discovery, risk shifting, hedging, market efficiency and operational advantages as the basic social and economic functions of the derivatives market (e.g. Powers and Castelino, 1991; Chance, 1995; Kolb, 1997). For instance, a futures market is an important means of obtaining investors’ expectations of future cash prices, which can help people make investment decisions more wisely (Kolb, 1997). The interest rate and foreign exchange derivatives markets enable those wishing to reduce their risk to transfer it to those wishing to increase it (Chance, 1995) and provide invaluable hedging tools against the risks. The derivatives market offers several operational advantages, such as lowering transaction costs and enhancing market liquidity (Chance, 1995).