Uses & Advantages of Derivatives It helps to control, avoid, shift and manage efficiently different types of risk through various strategies like hedging, arbitraging, spreading, etc. Derivatives serve as barometers of future trends in prices which result in the discovery of new prices both on the spot and future markets. Derivatives trading no immediate full amount of the transaction is required since most of them are based on margin trading. As a result, large number of traders, speculators and arbitrageurs operate in such markets. So, derivative trading enhance liquidity and reduce transaction costs in the markets for underlying assets. If the investors, traders and managers may make proper asset allocation, they will yield and achieve investment goals. FINANCIAL DERIVATIVES/SNSCT/MBA

Uses & Advantages of Derivatives The derivative trading encouraging the competitive trading in the markets, resulting in increase in trading volume in the country. Derivative trading develop the market towards ‘complete markets’. Complete market concept refers to the situation where there is no further scope of additional security. FINANCIAL DERIVATIVES/SNSCT/MBA

FINANCIAL DERIVATIVES/SNSCT/MBA Risks in Derivatives Speculative and Gambling motives It promotes speculative activities in the market Trading volume in derivatives have increased in multiples of the value of the underlying assets. Increase in risk Especially OTC markets are self regulated, they are high risky. Instability of the financial system It creates risks not only for the user but for the whole financial system. The fears of micro and macro financial crisis have caused to the Unchecked growth of derivatives which have turned many market players into big losers. Malpractices, fraud etc have threatened the stability of the financial markets. FINANCIAL DERIVATIVES/SNSCT/MBA

FINANCIAL DERIVATIVES/SNSCT/MBA Risks in Derivatives Price Instability Derivatives have caused fluctuations in asset prices and moreover , they have widened the range of such fluctuations in the prices. Sometimes it cause s price instability rather than price stability. Displacement effect There is another doubt about the growth of the derivatives market that they will reduce the volume of the business in the primary market specifically for the small and new corporate units. So raising fresh capital is difficult, this will create displacement effect in the financial markets. Increased regulatory burden It creates more instability in the financial system, there will be more burden for the government or regulatory authorities to control the activities of the traders. FINANCIAL DERIVATIVES/SNSCT/MBA

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