Why gained derivatives such a great popularity only in the past decades, even though they are...

Why gained derivatives such a great popularity only in the past decades, even though they are very old financial instruments. How is it related to option pricing?

Expert Solution

Derivatives got a great popularity in the past decade because of high liquidity and their ability to overall impact the market price dramatically.

When recession of 2008 hit, it was attributable to a large amount of of hybrid derivative instruments which exposed a lot of major financial institution to high amount of credit risk and insolvency problems.legendary investor Warren Buffett also called them a weapon of mass destruction of wealth.

Derivatives gained popularity in the past decades because they could be traded with the of high amount of leverage and low amount of capital. They are highly speculative in nature and it can help generate a lot of money for people who want to have a lot of risk.

With the emergence of electronic trading all over the world, the derivative have become very faster to execute and they can be executed with higher volumes without much of the liquidity problems, so they could be a very good financial instrument to create wealth for such people who do not want to hold stocks and who are highly speculative in nature rather than a long term investor.

it is highly related to option pricing because options are part of derivative and any change in futures price would lead to subsequent change in options price as they are all based upon the price of the underlying asset.

jeff jeffy answered 1 year ago

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