Blaming derivatives for human failures is quite unfair. Those who used derivatives to reduce their risks have never lost. But those who bought risks out of sheer greed have failed when unexpected developments happened.
Derivatives have their good sides and bad sides.In the hands of the misinformed they are weapons of mass destruction and Governments are forced to find ways and means to rescue them from going under due to far greater implications of their failures. These rescue efforts create moral hazards.
There are thousands of books written on derivatives showering praise on them. There are large numbers of derivative strategies that look very good and profitable on paper. Most of the books have not bothered to delve into the risks these strategies carry when put into practice. Many of them are directional strategies that make the trader take a view of the market before executing a particular strategy. It is practically impossible for an institution or an individual however informed to predict the future consistently in this global market, not to speak of the uninformed individual. That is why most of the so called wonderful strategies fail.
Author: Cyriac Kandathil
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