In Hong Kong, for example, thousands of pundits in stock index futures saw their fortunes dissipated almost overnight when the stock market was crushed by the Asian financial crisis of late 1997.

Yet in reality derivatives, which became popular in the early 1990s, have evolved into essential tools for financial institutions and investors to maximize the potential value of their investments while trying to minimize risks.

As the Chinese stock market attracts a consistent flow of investment funds, the introduction of index futures has become all the more pressing as it can help smooth out potential sharp swings by allowing institutional investors to lock in their profits in uncertain times without having to sell their holdings.

There is, of course, always the need for speculators who are willing to take big, presumably calculated, risks to make the market in this zero-sum game. But not everyone has to stake so much.

The China Financial Futures Exchange (CFFEX), based in Shanghai, has taken a cautious approach to the introduction of index futures, its first financial derivatives product. The exact date of its introduction has yet to be determined, notwithstanding the fact that the Singapore futures exchange has already begun trading in financial futures contracts based on Chinese stock.

CFFEX's cautiousness is understandable. Other than setting up a dependable and efficient trading and clearing system, the exchange's main concern focuses on the education of market participants, both market makers and public investors.

In developed markets, financial derivatives are touching the lives of people who may never have bought or sold futures contracts. For example, many Hong Kong banks have introduced savings plans tied to changes in the benchmark bank interest rate.

If the rate swings the right way, the depositors are entitled to an interest income at a rate that is higher than quoted deposit rates. If they lose out, all the depositors have lost is the interest income.

Using financial derivatives, banks can offer many custom-made products and services to corporate treasurers and high-net-worth clients.

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