The importance of Derivatives Markets include following specific functions like other segments of financial market:
Derivatives market assists in enhancing the price discovery based on actual valuations and expectations.
Derivatives market helps in transfer of various risks from those who are exposed to risk but have low risk appetite to participants with high risk appetite.
Hedgers want to give away the risk where as traders are willing to take risk. The hedgers are the people or institutions who want to safe guard their physical or paper asset by hedging through derivatives. The traders are one who take speculative trades in a particular direction.
Derivatives market helps shift of speculative trades from unorganized market to organized market. Risk management mechanism and surveillance of activities of various participants in organized space provide stability to the financial system.
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In our next educational series we would discuss on ‘Risk of Trading Derivatives‘
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