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101 Concepts for the Level I Exam

Concept 89: Purposes of and Controversies Related to Derivative Markets

Purposes:

  • facilitate the transfer of risk
  • allows strategies and payoffs not otherwise possible with spot assets
  • provide information about the spot market
  • offer lower transaction costs
  • reduce the amount of capital required
  • easier to short derivative than it is to short the underlying
  • improve the efficiency of spot markets

Controversies: They are sometimes referred to as a form of legalized gambling that can lead to destabilizing speculation.

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