Started 14th Sep, 2018

Analyse the impact of the derivatives markets/instruments on economic growth

Assume that you have an opportunity to visit a civilization in outer space. Its society is at roughly the same stage of development as our earth society is now. Its economic system is virtually identical to that of the earth, but derivative trading is illegal. Briefly introduce, explain, compare and contrast this economy with the earth economy, emphasizing the differences due to the presence of derivatives markets/instruments in the latter.

All replies (3)

14th Sep, 2018
João Batista Ferreira
Universidade Federal de Lavras (UFLA)
In practice what dictates the rules are supply and demand, and especially investor confidence.
Derivatives are dependent on the conditions of the asset in question, which in turn depends on other variables, such as: economic conditions of the country, asset management itself.
Thus, the reliability of the asset will provide a chain increment, both in the price of the asset, as in the derivatives and vice versa.
18th Sep, 2018
Peter Molnár
University of Stavanger (UiS)
That alternative universe would be slightly less developed. Derivatives are very useful in risk sharing, and therefore contributribute to general development of society.
19th Sep, 2018
Andreas Georgantopoulos
Metropolitan College
The answer is twofold as I see it.
First of all, derivatives can be seen as a very useful tool to hedge your positions. Doing so, you can protect your investments depending on your risk profile. Assuming that derivatives where illegal, a shipping company, for example, would not be able to plan the capital that should be available in order to schedule a future purchase of oil leading to increased operational risk.
On the other hand, if you are a speculator/risk-seeking investor, being able to invest your capital solely in derivatives even without holding or wanting to use in a productive manner the underlying asset, you could generate huge profits (which is good...) but also huge losses! Therefore, assuming that most investors are risk-seekers and pursue easy and short-term profits, derivative products tend to increase market volatility and uncertainty/unpredictability.
To conclude, personally I would prefer to visit "a civilization in outer space" as you mention, where investments in derivatives are allowed only when used as a hedging instrument from rational investors and I would prefer investments in derivatives to be illegal when used as a bet to beat the market, which is the case when an investor takes a long or short position without holding or wanting to use "productively" the underlying asset.
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