Question

Analyze the complexities of the derivative markets and how the reporting of derivatives may be deceiving to investors.

Answer 1

The Derivatives Market is meant as the market where exchange of derivativestakes place. Derivatives are one type of securities whose price is derived from theunderlying assets. And value of these derivatives is determined by the fluctuations in theunderlying assets. These underlying assets are most commonly stocks, bonds, currencies,interest rates, commodities and market indices. As Derivatives are merely contractsbetween two or more parties, anything like weather data or amount of rain can be used asunderlying assets. The Derivatives can be classified as Future Contracts, ForwardContracts, Options, Swaps and Credit Derivatives.Improper reporting of derivatives may lead to create wrong notion about themarket conditions and thus improper decisions can be taken based on the unreliableinformation. The incorrect reporting deceives investors and the implied risk and returnsturns out to be different.