rnd::read
http://www.cato.org/pubs/pas/pa-283.html (Cato insitutute’s Thomas F. Siems on financial derivatives, 1997)
Interesting read. “The freedom to manage risk effectively must not be taken away” . Like this one. Has a real “manifesto” thing to it. Hopefully, that’s not the only argument there is, since, if observed in real context of options markets as zero-sum-game, this would efficiently mean “a right to transfer risk”, perhaps promoting inequality between more and less capable/fortunate. Ability to manage individual risk is definitely beneficial, but what are the macro implications ?
“the explosive use of financial derivative products in recent years was brought about by three primary forces: more volatile markets, deregulation, and new technologies.” - excellent point. For example, various option trading strategies enable us to benefit from the volatility alone, effectively reducing the negative effects from it. Also, using options enable us to promote advancement of new technologies by placing affordable “bets” on their success. However, the fact that such options are highly leveraged and promote dramatically asymmetric gains might not be better off for everyone.
“to better control risk” - this is a speculative argument, since it might both mean “minimize risk exposure” or “enable controlled exposure to much more risk”
(target audience of the article is definitely bellow-average, as it has a general “no no, you stupid, this was around since Aristotle” - tone) - definitely not appropriate on this subject. However, since the general note of the text is apologetic, this might be a reasonable choice.
”The financial derivatives market’s worth is regularly reported as more than $20 trillion.” - it would be definitely of interest to lookup the figure on value of non-executed options contracts vs gains from executed, and look for parity vs gain + vs total predicted stock market loss if options contracts were not used (todo : find the figures or readily-available reference). General 20-year as well as short-term trends of this variable would be interesting.
” Derivatives also help to improve market efficiencies because risks can be isolated and sold to those who are willing to accept them at the least cost. ” - exactly the point. Still looking for macro benefits of this, though and for a scenario of loss of the put/call parity, in the case of the dramatic “least cost” of accepting the risk drop. Yet - it might be the case that there always is a party willing to accept the risk at “rational” price. How about market irrationality ? Illiquidity ?
”by selling short a $1 million Treasury-bond futures contract, the SRB can effectively hedge against that interest-rate risk and smooth its earnings stream in a volatile market.” - getting to the point. A overall interest-rate decrease is a serious macro benefit (though only assuming that it is a objective benefit, rather than risk-taking promoter)
”The economic benefits of derivatives are not dependent on the size of the institution trading them.” - a vague argument. Reference for efficiency (definition ?) of derivative utilization vs institution/liquidity pool size needed.
(rest of the arguments seem just appended for filling the 10-figure list :) )
overall - interesting first-stop read, however not much interesting argumentation/reference. Moving on …
