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Please answer the question: how one of the most risky tools of finance, derivatives, have been...

Please answer the question:

how one of the most risky tools of finance, derivatives, have been used to manipulate markets and the resulting effect on prices of goods?

Homework Answers

Answer #1

Derivatives means forwards, futures, options, and swaps.

Derivatives, have been used to manipulate markets and the resulting effect on prices of goods.

Let us take an example.

This you can observe in commodities markets.

Suppose I have a wheat field and if this year I have a surplus and I want to fix the price in order to protect myself. So to Hedge I will buy wheat in futures market . If I am having a huge surplus I will buy in large quantities and it will rise future prices. Since spot market closes follows future markets , this spot markets also moves.

If spot market doesnt follow futures then there will be an oppurtunity for arbitrage. So the futures are deciding the spot price.

So overall futures are manipulating the spot prices.

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