Bachelor's thesis (Turku University of Applied Sciences) Degree Program in Business Management

disintermediation that banks became more embedded in investment 
activities, trying to use new financial instruments and technologies for 
management of investment portfolios and securities and in such way 
compensate their losses from traditional banking operations (Buch and 
Golder, 1999, p. 12). 
A lot has been said about the strengthening of international competition 
in financial markets. While, on the one hand, growing competition 
between international companies and financial institutions led to an 

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TURKU UNIVERSITY OF APPLIED SCIENCES THESIS | Artem Vorobyev 
increase in financial market efficiency, it stimulated a lack of 
transparency connected with international investment activities on the 
other. 
Undoubtedly, the most transparent and obvious tendencies in recent 
developments of financial markets are represented by rapid technological 
progress and consequent informatisation (becoming more and more 
information dependent) that have literally revolutionized the way financial 
markets operate nowadays.
Now it is appropriate to proceed with a deeper analytical approach to 
corresponding challenges that have occupied the field of commercial banking 
and, as a result, facilitated their investment activities putting additional 
pressures and constraints on simple everyday operations. 
4.8 Volatilities in financial markets that affect commercial and Central Banks 
The above quoted study of Kahveci and Sayilgan has identified the core 
challenges resulting from globalization and consequent rapid development of 
financial markets that central banks and commercial banks have to experience 
nowadays (Kahveci and Sayilgan, 2006, p. 88). For additional reference, please 
refer to 
Appendix 2
. 
Essentially, these challenges serve as a summary of occasionally encountered 
investment hazards that dominate the field of commercial banking.
In principle, the growing globalization, technological innovations, as well as 
disintermediation and informatisation trends have decreased the role of 
traditional banking credit operations in certain countries (Edwards and Mishkin, 
1995, p.30) and strengthened the overall volatility and unpredictability of 
financial markets (Kahveci and Sayilgan, 2006): 
While recent economic developments of financial markets have 
increased the amount of risks that investors (in our case 
– commercial 
banks) have to face internationally, it has forced a larger amount of 

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TURKU UNIVERSITY OF APPLIED SCIENCES THESIS | Artem Vorobyev 
investment profits to be distributed among potential risk management 
strategies, thus decreasing the net profitability of investment activities. 
Increased volatility of financial markets has also been often characterized 
by a noticeable instability of global interest rates and correlating prices of 
various financial instruments, making it more risky for banks to invest 
money, since they are becoming more and more liable to negative 
influences of market risks (Kahveci and Sayilgan, 2006, p. 88). 
Further necessity to seek additional sources of funding and identify 
potential safeguard strategies has led commercial banks to new risks 
connected with unpredicted 
speculations: “Volatility enhances the 
opportunities for profitable but risky international investments on 
securities. The hedging instruments enable speculators to leverage
2
their 
investments by decreasing their risks, the speculative flows, therefore, 
in
crease volatility” (Kahveci and Sayilgan, 2006, p. 90). 
Some of the discussed processes (e.g. globalization and technological 
innovations) have rendered banking services much more complex, 
making it generally harder for central banks to monitor the 
implementation of financial policies and regulations. 
One of the key objectives of current Thesis paper is to introduce such 
methods of financial innovation, like derivative instruments that have not 
only allowed for greater leverage possibilities, but also imposed potential 
investors to higher levels of risks and uncertainty (Casu, Girardone and 
Molyneux, 2006, p. 435). While commonly seen as a logical development 
stage of modern financial markets (derivative instruments have first been 
introduced to the world in early 70s) in the direction of more efficient 
distribution of funding, these investment operations have since turned out 
to be highly affected by the instabilities of several markets relating to the 
underlying securities and corresponding derivative trading transactions 
(Gunther Capelle-Blancard, 2011). Even Warren Buffet has once 
declared: 
“I view derivatives as time bombs, both for the parties that deal 
in them and the economic system” (Buffet, 2003). 
2
Leverage allows increasing the profit margin of an investment by resorting to such financial 
instruments, as derivatives (
investopedia.com
). 

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TURKU UNIVERSITY OF APPLIED SCIENCES THESIS | Artem Vorobyev