Options

hedging, speculation

decrease, increase

Derivatives trading has been popular since the futures market for wheat was established. Since then, traders, brokers, and speculators have been involved in transactions involving derivatives, leading to the evolution of the derivatives markets. Based on your understanding of the derivatives markets, answer the following questions. the Speculators add capital and participants to the derivatives markets. Thus, speculators derivatives markets. increase the risk of help stabilize Futures markets are an evolutionary improvement from the days when wheat farmers faced uncertainty about the prices they would receive for their harvested crops and millers were uncertain about the cost of their future wheat purchases. What is the advantage to farmers of having a predetermined price for their crops? Likewise, what is the advantage to millers of having advance knowledge of the cost of their wheat? It replaces price uncertainty with price certainty. It gives farmers and millers something to worry about in addition to working their fields or running their mills. It replaces price certainty with price uncertainty. In general, the futures and other derivatives markets have supported two types of activities: (1) investments made to limit or reduce the risks and losses associated with other transactions and (2) financial transactions made to profit from changes in price. The second activity is referred to as The highly leveraged nature of derivatives transactions is an important operational consideration for their use, because it significantly the riskiness of a speculative transaction. occur when aggregate risk can be reduced by derivatives transactions between counterparties