Economic Function of The Derivative Market
Some of the salient economic functions of the derivative market include:
- Prices in a structured derivative market not only replicate the discernment of the market participants about the future but also lead the prices of underlying to the professed future level. On the expiration of the derivative contract, the prices of derivatives congregate with the prices of the underlying. Therefore, derivatives are essential tools to determine both current and future prices.
- The derivatives market relocates risk from the people who prefer risk aversion to the people who have an appetite for risk.
- The intrinsic nature of derivatives market associates them to the underlying Spot market. Due to derivatives there is a considerable increase in trade volumes of the underlying Spot market. The dominant factor behind such an escalation is increased participation by additional players who would not have otherwise participated due to absence of any procedure to transfer risk.
- As supervision, reconnaissance of the activities of various participants becomes tremendously difficult in assorted markets; the establishment of an organized form of market becomes all the more imperative. Therefore, in the presence of an organized derivatives market, speculation can be controlled, resulting in a more meticulous environment.
- A significant accompanying benefit which is a consequence of derivatives trading is that it acts as a facilitator for new Entrepreneurs. The derivatives market has a history of alluring many optimistic, imaginative and well educated people with an entrepreneurial outlook, the benefits of which are colossal.
In a nutshell, there is a substantial increase in savings and investment in the long run due to augmented activities by derivative Market participant.
Read more about this topic: Derivative (finance)
Famous quotes containing the words economic, function, derivative and/or market:
“Motherhood is the second oldest profession in the world. It never questions age, height, religious preference, health, political affiliation, citizenship, morality, ethnic background, marital status, economic level, convenience, or previous experience.”
—Erma Bombeck (20th century)
“Of all the inhabitants of the inferno, none but Lucifer knows that hell is hell, and the secret function of purgatory is to make of heaven an effective reality.”
—Arnold Bennett (1867–1931)
“When we say “science” we can either mean any manipulation of the inventive and organizing power of the human intellect: or we can mean such an extremely different thing as the religion of science the vulgarized derivative from this pure activity manipulated by a sort of priestcraft into a great religious and political weapon.”
—Wyndham Lewis (1882–1957)
“A sentimentalist, my dear Darlington, is a man who sees an absurd value in everything, and doesn’t know the market price of any single thing.”
—Oscar Wilde (1854–1900)