Question

Niall Ferguson seems to be at odds with the venerable investor Warren Buffett who called financial derivatives “the weapons of mass destruction”. Ferguson seems to favor derivatives in managing risk. Take a position in his favor or in Buffett’s favor and defend your position with logical, rational arguments.

Answer 1

Ferguson is right in his claim.

Derivatives are highly useful in risk management. Hedging and speculation are startegies used for managing risks in business. Along with them derivatives are useful tools which help companies to manage the risk involved in business. Derivatives help in improving market efficiency for the underlying asset. So the investors can get exposure to the investments without entering the expense of purchasing underlying assets. Derivatives are also helpful in reducing the cost of trading. They provide higher liquidity for the investors and increase the volume of transactions. This is useful in bringing the savings into the economy and helps in boosting the economy