Finance Question - hope this is ok for this forum

[spitz10]

Hey guys, I am working on a finance project for class, and we have to come up with an answer for this question:

Has the growth of derivatives markets increased the instability of the financial markets?

I have searched on google for awhile, but havent really been able to come up with anything that specific. Is there anyone out there with some decent finance knowledge that could help me with this question?

I hope this is ok for this forum, and I appreciate any help ahead of time. Thanks guys.

 

[JJChicken]

dont search on google, use your electronic library catalogues.

 

[DaWhim]

no, I don't think so. the use of financial derivatives is primarily for hedging risk.

computerized trading has increased the instability of financial markets, the key word is "contagion."

 

[spitz10]

I agree, but since derivatives also allow for such speculation, while also being leveraged, couldnt that lead to more instability?

 

[JJChicken]

they are primarily used for hedging risk. many times companies hedge their risks through buying/selling derivatives and speculators take the other side of the deal. they are risk management instruments foremost. thats what my lecturer told me.

 

[Nerva]

i believe buffet called exotic derivatives weapons of mass destruction for financial markets

 

[LegendKiller]

Originally posted by: Allen Iverson
they are primarily used for hedging risk. many times companies hedge their risks through buying/selling derivatives and speculators take the other side of the deal. they are risk management instruments foremost. thats what my lecturer told me.

It depends on the derivative. Interest rate swaps, futures, forwards...etc, have certainly aided in the ability to hedge. However, when looking at the transaction of all underlying, it's pretty easy to see that there is a massive disconnect between the notional value of derivatives and the underlying.

Derivatives make it very easy to participate in the underlying without paying for the underlying. Whether or not it's increased volatility, I don't think so. Volatility as a whole isn't horrible.

If you were to ask me what has increased volatility a lot, it'd be hedge funds that trade on events or are large program traders. These guys enter and exit the market quickly but don't rely as much on derivatives as the underlying.

 

[spitz10]

So hypothetically, if people ONLY used derivatives to hedge, could one say that derivatives actually INCREASE stability?