Financial derivatives

    Many people believe that the growing use of options and other financial derivatives is a huge benefit to the marketplace, improving efficiency and diversifying risk amongst a much wider group of investors. Others believe that derivatives are highly risky, that most parties which deal in derivatives don’t understand the underlying risks and as a result the overall amount of risk being accepted by our financial markets is much larger than anyone really appreciates. Yet others (and there obviously can be some overlap), believe that some derivative instruments (like credit default swaps) increase the likelihood of a company or country defaulting since they provide incentives to market participants to encourage defaults or bankruptcies. What are your thoughts?