What is the role of derivatives in capital markets?

Economics Derivatives Questions



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What is the role of derivatives in capital markets?

The role of derivatives in capital markets is to provide financial instruments that allow investors to manage and hedge risks, speculate on price movements, and enhance market liquidity. Derivatives enable participants to transfer risks from one party to another, thereby reducing overall risk exposure. They also provide opportunities for investors to profit from price fluctuations without owning the underlying assets. Additionally, derivatives contribute to market efficiency by increasing liquidity and facilitating price discovery.