There are five main risks associated with trading derivatives:
1.Credit Risk: All usual risks related to the counter party during any financial transaction.
2. Market Risk: As the name suggests market risks are correlated with the various market parameters. Changes in certain parameter can alter the value of the contract.
3.Operational Risk: Risks associated with the general course of business operations are termed as operation risks. They include:
(a)Settlement Risks - If there is a timing difference between receiving the payments/assets and deliverable between the two parties then it can lead to a settlement risk.
(b)Legal Risks - Different laws are valid in different regions i.e. Cross borders, and so it is possible that certain parts of the contract are not enforceable once you have crossed the border.
(c) Lack of information, monitoring and control systems, can end up in fraud, human error, system failures, management failures, etc.
4.Strategic Risk: Following activities lead to strategical risks:
(a) Entrepreneurial behavior of traders in financial institutions
(b) Misinterpreting client requests
(c) Costs getting out of control
(d) Trading with inappropriate counter parties
5.Systemic Risk: Systematic risks can occur when a large financial organization in the economy fails in some way or the other thus leading to a flimsy situation in the pool of economy.