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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: epicure who wrote (71713)	12/16/1999 5:20:00 PM
From: BGR	Respond to of 132070

That, indeed, is true. However, derivatives are extremely useful in unbundling (and rebundling) of risk. Thus, investors can more accurately model their portfolios based on their risk preference. Better risk distribution - insurance, for example - is always better for business. For example, even today companies with large forex exposure can hedge their bets with derivatives and focus on the core business. Expand that to other business factors, like weather for a heating oil company, and you can see better resource allocation (a heating oil company need not be bothered with the requirement of making weather predictions, which far away from their core competency, but just buy some weather-based derivatives). This leads to more and more outsourcing of risk, which almost invariably raises productivity. Of course the total risk remains constant, but it is better distributed. As more companies use derivatives to unbundle risk, the pricing of such instruments become better and better! So, do not just think of the equities market from a (day) trading perspective, think of the economy-at-large.