As a hypothetical case, if we think of an investment in a bond denominated in Thai baht issued by a Thai firm, the investor faces various risks: foreign exchange risk, credit risk of the firm, interest rate risk, etc. Derivatives enable investors to unbundle these risks packaged in a bond into component risks – e.g.
the risk that the credit standing of the issuing firm or the Thai baht exchange rate falls below a certain threshold – and transfer and/or assume them at will. Financial innovation has enabled market participants to engage in these operations at significantly lower costs, and this has resulted in an expansion of transaction volumes.