12 Nov

I think that financial derivatives trading makes the market more efficient because risks can be isolated and spread out independently in a more consistent and diversified way, and moreover, they help reducing uncertainty (if used properly).  This relies on the fact that there is a whole market of derivatives, and thus, it is possible to attain to the same goal by using and mixing different products and choosing the best options available to maximize profits (or minimize risk). For example, given that a company has plenty of derivatives with different levels of risk, it will be able to transfer/sell those that do not fit the benchmark portfolio after some time T. This argument is further motivated by the fact that trading itself makes any market more efficient, as it if driven by the forces of supply and demand. These forces can definitely be applied to the situation since in the end derivatives are products, and as we all know, any product can be projected into a supply and demand analysis. Thus, in conclusion, derivatives makes the market better off because they provide an opportunity to reduce uncertainty and manage risks more efficiently.

Question of the week: I understand that financial derivatives are all based in a group of similar basic characteristics. The differences between derivatives rely on deeper details. Then, what do you think are the basic characteristics that give the name of a derivative to a financial product? Do you know which were the first types of derivatives that were used in the financial market and what was there main objective by then?


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