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Essay / Research Paper Abstract
This 4 page paper is written in two parts. The first part considers the benefits of using derivatives such as the transfer of risk and increased efficiency in a market, the second part of the paper looks at the potential of moral hazard occurring where a risk is covered. The bibliography cites 5 sources.
Page Count:
4 pages (~225 words per page)
File: TS14_TEdervbenr.rtf
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Unformatted sample text from the term paper:
to briefly consider what we mean by derivatives and consider how they are used. A derivative is a financial tool that has a price which will bear a strong correlation
with an underlying, or related subject; this may be currency, commodities or other financial instruments. The most popular of the markets are futures and options. In reality the markets
are extremely sensitive to these movement due to the way in which trading takes place. The majority of trading takes place on the futures basis rather that the actual basis,
or spot basis. The aspect of supply can be seen as effecting the price. This means influences which are not under the control of any producer are monitored carefully
by commodity traders. The volatility of prices in general does not have a great deal of effect on the way in which the demand for primary goods fluctuates, as primary
goods generally have a low elasticity. Therefore the derivatives do not impact directly on the markets for the goods they are related to, their advantages may be seen as further
reaching that this. The price of the underlying goods will fluctuate. This fluctuation is a risk, but with the use of a futures contract or an option there can
be the reduction of exposure to risk by a purchaser that need the underlying goods. These contracts are therefore a means of reducing risk. They are an efficient method of
reducing risk as the only variable on the contracts will be the price that they are being sold at, therefore all contracts are comparable, this make comparisons in the futures
market slightly easier, but it also can mean that any direct comparison with the spot market may not be so simple (Demetrakakes , 1999, Androshick, 1999). This means they
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