Derivatives

Topic D: Derivatives (e.g.. options, futures) are often criticized for being too risky and causing massive losses to investors (e.g. Barrings Bank, LTCM). Explain the role of derivatives in financial markets and their desirable and undesirable uses. The use of derivatives in the financial market has dramatically increased in recent years. This relevantly recent change in the status of derivatives has led to calls for increased regulation. Fears that using derivatives to hedge …

…that they provide add to the efficiency and complicity of the international financial system. At the same time inter-linkages also mean that disruptions in OTC activities necessarily entail spillovers and contagion to these other markets. The unpredictable and at times turbulent, nature of OTD derivatives markets would merit little concern if OTC derivatives were an insignificant part of the world of global finance. They are increasingly becoming an important instrument in the global finance world.