Economics Derivatives Questions
Derivatives contribute to price volatility by amplifying and accelerating price movements in the underlying asset. This is primarily due to the leverage effect and the speculative nature of derivatives trading. When investors use derivatives to take positions on the future price movements of an asset, it can lead to increased buying or selling pressure, causing prices to fluctuate more rapidly and dramatically. Additionally, derivatives can also create a domino effect, where the price movements in one derivative market can spill over and impact other related markets, further increasing volatility.