Global Financial Markets: Derivatives : Why were derivatives invented? Have they served their true economic purpose or have they only served the purposes of the few?

Abstract

From the history of derivatives we learn that risk management is the reason why derivatives were invented in the first place. It is the process of identifying the desired level of risk, identifying the actual level of risk and altering the latter to equal the former.This process can fall into the categories of hedging and speculation whereby hedging is a strategy for reducing the risk in “holding a market position” while speculation refers to “taking a position” in the way the markets will move. Nowadays, hedging and speculation strategies are synonymous with derivatives, they are the tools or techniques that enable companies to more effectively manage risk. Derivatives have been blamed when investors failed to achieve their objectives. However, it is the investor who usually has not fully understood how it should be used with all its inherent risks, etc. While professional traders and money managers can use derivatives effectively, the odds that a casual investor will be able to generate profits by trading in derivatives are mitigated by the fundamental characteristics of the instrument.

The market fundamentalist policy that has been in place now for over thirty years, is plagued by “economic weakness and contradiction” and has produced a bleak economic outlook in both the private sector and global economy. Debt saturation and low demand have become the order of the day. Such an environment is doomed to stagnation and the current policies of monetary expansion and fiscal policy are not the answer to sustainable growth with shared prosperity. Given their popularity in the global market, a balance has to be found so that derivatives will benefit society as a whole.

In my thesis I have identified their advantages and disadvantages, however a road leading to shared prosperity is the only way forward and there exist many tools e.g. social media, which can be used for the global good.