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?

Solutions

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

Next > < Previous

Related Solutions

1) Why do you think Non-transaction deposits have gained such popularity over the past 30 years...

1) Why do you think Non-transaction deposits have gained such popularity over the past 30 years while checkable deposits have lost popularity? Remember these are Liabilities of the bank. 2) Assume that the First National Bank shown in the T-accounts is the only bank in the country, besides the Federal Reserve and the bank has No Excess reserves. Assume the person who took out this loan used the money to buy a $90 piece of equipment (it's why people take...

Q2. In the past two decades, nontariff trade barriers have gained in importance as protectionist devices....

Q2. In the past two decades, nontariff trade barriers have gained in importance as protectionist devices. The major nontariff trade barriers include import quotas, voluntary export agreements, subsidies, buy‑national policies, product and safety standards, and content requirements. What is meant by voluntary export restraints and how do they differ from other protective barriers?

Cruises gained popularity in the U.S. over the past 20 years. Experts predict continuous growth post...

Cruises gained popularity in the U.S. over the past 20 years. Experts predict continuous growth post COVID-19. What do you think are some contributors to this growth? Share your ideas with us in class.

“Globalisation is the great economic theme of the past decades, affecting not just business but much...

“Globalisation is the great economic theme of the past decades, affecting not just business but much of the world as a whole.” Please discuss this statement. (30 Marks 1500 words)

1. Even though the Bohr model had great success that the theoretical calculated Rydberg constant is...

1. Even though the Bohr model had great success that the theoretical calculated Rydberg constant is so close to the experimental value, still there's small yet detectable discrepancy. What is the factor that is responsible to this discrepancy if taken into account one achieves perfect Rydberg constant? 2. Estimate the size of the aluminum nucleus (Z=13), using a beam of alpha particle having kinetic energy of 7.7 MeV.

2."Even though the Great Recession officially ended, the unemployment rate is still considered high." Discuss.

why are the symptoms of adrenal and pituitary Cushing's the same, even though the cause of...

why are the symptoms of adrenal and pituitary Cushing's the same, even though the cause of it are different? Based on the symptoms of Cushing's, explain whether or not its actions are anabolic or catabolic.? The dexamethasone suppression test is used to determine if Cushing's is pituitary based. Explain why cortisol should remain elevated in those with secondary pathology

Why would a firm decide to produce a positive quantity of a output even though it...

Why would a firm decide to produce a positive quantity of a output even though it makes negative profits by doing so? A. Because the price is high enough to cover the average fixed cost. B. Because the price is high enough to cover the average total cost. C. Because the price is high enough to cover the average variable cost. D. A firm would never produce when profit is negative.

Waterway Family Instruments makes cellos. During the past year, the company made 6,380 cellos even though...

Waterway Family Instruments makes cellos. During the past year, the company made 6,380 cellos even though the budget planned for only 5,580. The company paid its workers an average of $15 per hour, which was $1 higher than the standard labor rate. The production manager budgets four direct labor hours per cello. During the year, a total of 24,790 direct labor hours were worked. (a) Calculate the direct labor rate and efficiency variances. (If variance is zero, select "Not Applicable"...

Part 1 - Warby Parker started its business selling eyewear on line only, even though the...

Part 1 - Warby Parker started its business selling eyewear on line only, even though the majority of glasses (to include sunglasses) in the country are sold through bricks-and-mortar. What are the advantages of this? What are the disadvantages? Would you buy/have you ever bought eyewear on line? Would the Warby Parker home-try-on option appeal to you? Please share your experience/thoughts. Part 2 - What do you look for when purchasing fashion eye wear and how important is the brand...

Subjects