Are financial derivatives good or bad? Benefits and threats of using financial derivatives

Abstract or Introduction

In the essay the author discusses some of the most important risks and threats of using financial derivatives by explaining them. The essay deals with questions like: Are financial derivatives really a threat for firms and, worse, for the whole economy? Do they increase welfare? If yes, who benefit the most? Are there losers?

Warren Buffet, without any doubt one of the most famous investors of the world, once referred to financial derivatives as “Financial weapons of mass destruction”. Ed Murray, practicing lawyer and senior member of the Allen & Overy team advising ISDA (International Swaps and Derivatives Association), states that derivatives played an important role and worsened the Financial Crisis.

Many more influential people seem to point accusing fingers to financial derivatives, stating that derivatives may bear significant problems people are underestimating. Since the derivatives market have been growing immensely since the 1970s to todays unbelievable estimated notional value of 1,2 quadrillion US dollars, more than ten times the gross world product (107,5 trillion US dollars), financial derivatives play an extremely important and growing role in todays financial system. Therefore we should be aware of the problems, risks and threats coming with the usage of derivatives instrument.