Question

In: Finance

Briefly discuss the role, if any, played by speculators in the derivatives markets, preferably with some...

Briefly discuss the role, if any, played by speculators in the derivatives markets, preferably with some real-world examples. Do speculators hinder or help the smooth functioning of derivatives used in international financial, and how?

Solutions

Expert Solution

Speculators are playing an important role in derivatives market because they used to speculate the future direction of the market and they are trying to discount those future direction of the market at the present and they are trying to maintain the price according to the the projected movement of the share market.

Speculators are generally leading to a healthy price discovery into the share market through appropriate demand and appropriate supply of securities and these speculators are trying to to enhance the transparency into the overall share market and they are trying to adopt a fair price discovery mechanism through large demand and supply so they are also leading to volume generation into the share market and they are also leading to transparency in operational mechanism of the share market.

Speculators are trying to increase the volatility into the share market and they are also generating the volume into the share market like one can example it through the recent wild movement during the coronavirus crisis when the share market was discounting the negative impact of coronavirus on the economy and it led to a sharp correction due to speculators taking their position on the downside and they were trying to to dump their stocks.

Speculators are trying to help the smooth functioning of the share market through appropriate generation of demand and supply and their maintenance of transparency along with high volume participation so these speculators are leading to smooth functioning of the share market through large participation and fair price discovery mechanism.


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