Conclusion
There is no doubt the financial institutions are very interwoven and can affect each other greatly, derivatives carrying very big figures and not being understood very well therefore would be a cause for concern. There are other issues that are brought up by those wanting more regulation such as: - The high degree of leverage common to derivatives. - The fear that companies using them could drag each other down, - The risk that banks are accumulating, and - The fact that derivatives are " zero-sum games' means one investor will always loose out at another's expense. However we must now bring forward the case of those who are against any further interference by outside regulators. They say that derivatives are basically being blamed for all these disasters (such as Barings PLC and LTCM) just because they are not understood, and therefore this must be the problem, but looking closely at the mishaps proves that it is their misuse and not the nature of the derivatives to blame. They go on to inform us that there is sophisticated risk-management systems in use to help react to sudden adverse movements, and that drills already have been carried out. They also say that the market is the best assessor of its needs if supplied with sufficient information and not outside regulations and restrictions. Basically according to them, derivatives must be used properly and be understood to supply benefit, however this raises the question of how the average investor can understand derivatives when the writers do not? From what has been discussed it seems clear why derivatives have cause for concern.
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