Derivates in Market Essay example -- essays research papers fc

INTRODUCTION “A derivative is like a razor, you can use it to shave and make yourself attractive for your girlfriend, you can slit your throat with it or you can use it to commit suicide.’(Anon.) This statement describes to us the problems, and on the other hand rewards, that the proper use of derivatives can bring. The derivatives market has developed responding to the uncertainty about prices, and therefore provided a means of separating out this price volatility. The tendency of the market to move up or down in what appears to be a random manner has brought about the need for financial products which will protect or hedge the investor against the ill effects of market volatility. Certain types of derivatives called Futures and Options might do just that if used properly. In this essay we look at certain types of derivatives called Futures and Options, and how hedgers / investors make use of them to their advantage as well as where the threats seem to lie when dealing with them in g eneral. These derivative markets allow hedgers to avoid risk by transferring it to speculators who seek it. We have all heard the phrase “keep your options open'; and it is along these lines that the Options derivative has arisen. As we know options are contractual arrangements giving the owner the right, but not the obligation, to buy or sell something at a given price, at some time in the future. It is these Options in general that we want to address as they offer the investor the ability to create a wide variety of risk and return alternatives from the same underlying security. Futures, being exchanged-traded forward contracts, have also provided another choice to suit the needs of the holder and the advantages for and against these will also be looked at. After looking at the Futures and Options we will turn our attention to discussing the cases for and against the needs of further regulating this market. This issue has been strongly reinforced since many big bets have gone wrong, such as the collapse of Barings and many others. Where do the faults lie which have led to these disasters and who if anybody is to blame? These are matters that will need to be looked at. To begin with lets focus our attention on Futures contracts . Advantages / Disadvantages from the use of Future Contracts - As the market for future contracts is standardised ... ...ld result in the avoidance of future disasters but more self-regulation could be encouraged and set in play also. The bottom line is that anyone in the derivative business really needs to be more careful and have more control over what they are doing. Again Partnoy in his book FIASCO says, “ Most of us enter the investment business for the same sanity- destroying reasons a woman becomes a prostitute.’ So if you do decide to invest you should take the advice of the Office of Kansas Securities Commission which is “Investigate before you invest.’ BIBLIOGRAPHY - Edwards, W.H.W, Key Financial Instruments; Understanding motivation in the World of Derivatives - Lewis, M, (1989), Liar’s Poker, Coronet Books. - Office of Kansas Securities Commission website. - Partnoy, F, (1997), FIASCO Blood in the water on Wall Street, Profile Books. - Piesse, J, Piesnell, K, and Ward, C, (1995), British Financial Markets and Institutions, Prentice Hall. - Pike, R, and Neale, W, (1996), Corporate Finance Investment, Prentice Hall. - Rutterford, J, (1993), Introduction to the Stock Exchange Investment, Macmillan. - Specimen handouts given out in Lectures Derivates in Market Essay example -- essays research papers fc INTRODUCTION “A derivative is like a razor, you can use it to shave and make yourself attractive for your girlfriend, you can slit your throat with it or you can use it to commit suicide.’(Anon.) This statement describes to us the problems, and on the other hand rewards, that the proper use of derivatives can bring. The derivatives market has developed responding to the uncertainty about prices, and therefore provided a means of separating out this price volatility. The tendency of the market to move up or down in what appears to be a random manner has brought about the need for financial products which will protect or hedge the investor against the ill effects of market volatility. Certain types of derivatives called Futures and Options might do just that if used properly. In this essay we look at certain types of derivatives called Futures and Options, and how hedgers / investors make use of them to their advantage as well as where the threats seem to lie when dealing with them in g eneral. These derivative markets allow hedgers to avoid risk by transferring it to speculators who seek it. We have all heard the phrase “keep your options open'; and it is along these lines that the Options derivative has arisen. As we know options are contractual arrangements giving the owner the right, but not the obligation, to buy or sell something at a given price, at some time in the future. It is these Options in general that we want to address as they offer the investor the ability to create a wide variety of risk and return alternatives from the same underlying security. Futures, being exchanged-traded forward contracts, have also provided another choice to suit the needs of the holder and the advantages for and against these will also be looked at. After looking at the Futures and Options we will turn our attention to discussing the cases for and against the needs of further regulating this market. This issue has been strongly reinforced since many big bets have gone wrong, such as the collapse of Barings and many others. Where do the faults lie which have led to these disasters and who if anybody is to blame? These are matters that will need to be looked at. To begin with lets focus our attention on Futures contracts . Advantages / Disadvantages from the use of Future Contracts - As the market for future contracts is standardised ... ...ld result in the avoidance of future disasters but more self-regulation could be encouraged and set in play also. The bottom line is that anyone in the derivative business really needs to be more careful and have more control over what they are doing. Again Partnoy in his book FIASCO says, “ Most of us enter the investment business for the same sanity- destroying reasons a woman becomes a prostitute.’ So if you do decide to invest you should take the advice of the Office of Kansas Securities Commission which is “Investigate before you invest.’ BIBLIOGRAPHY - Edwards, W.H.W, Key Financial Instruments; Understanding motivation in the World of Derivatives - Lewis, M, (1989), Liar’s Poker, Coronet Books. - Office of Kansas Securities Commission website. - Partnoy, F, (1997), FIASCO Blood in the water on Wall Street, Profile Books. - Piesse, J, Piesnell, K, and Ward, C, (1995), British Financial Markets and Institutions, Prentice Hall. - Pike, R, and Neale, W, (1996), Corporate Finance Investment, Prentice Hall. - Rutterford, J, (1993), Introduction to the Stock Exchange Investment, Macmillan. - Specimen handouts given out in Lectures