Economics Financial Markets Questions
The role of derivatives in financial markets is to provide a means for investors and institutions to manage and mitigate risks. Derivatives are financial instruments whose value is derived from an underlying asset, such as stocks, bonds, commodities, or currencies. They allow market participants to speculate on price movements, hedge against potential losses, and gain exposure to various asset classes without directly owning the underlying assets. Derivatives also enhance market liquidity, facilitate price discovery, and enable efficient allocation of capital. However, they can also amplify risks and contribute to market volatility if not properly regulated and managed.