The evolution of derivative financial instruments is an important tool for large players, but the retail market’s need for risk mitigation is growing rapidly because of mounting uncertainties in the financial environment, the growing role played by small and medium sized businesses, and the greater responsibility which the individual now has for his/her own finances.  The main advantage of derivative instruments is that they enable users to identify different types of risk and deal with each of them separately.

This paper proposes several ways in which these features, that have been developed to meet the requirements of the wholesale market, can be applied to the needs of the retail market.  These are in the areas of:

· Housing finance
· Property indexation
· Expense hedging
· Pension management
· Foreign exchange cover

Further, established market makers could either package large numbers of small deals into sizes which would be tradeable on the established exchanges, or reduce them to their core components and trade them over the counter in standardised contracts.  In addition, there are no regulatory reasons why derivatives should not be used or traded by individuals.

Please note: This paper is based on the situation in 1993.  Available as photocopy only.