ABSTRACT
This chapter focuses on the derivatives documentation made available by International Swaps and Derivatives Association (ISDA). The ISDA master agreement comes replete with clauses and terms which give rise to subtle interpretations and, sometimes, contentious wrangling. Parties entering into financial derivatives are unlikely to draft new contracts from scratch each and every time they engage in a derivative transaction. From a legal perspective, the dichotomy between hedging and speculative purposes entailed to the investment in derivatives was underlined by numerous court decisions in Britain, dating back to the early 1990s. In a controversy concerning a number of banks selling derivatives to local authorities, it was held that the sole reason for such authorities acquiring derivatives was of a speculative, rather than a hedging nature, given the fact that they were exclusively seeking a profit from the fluctuation of interest rates. In contemporary financial practice, derivatives can be distinguished between the option, the forward and the swap.
