The economics of derivatives / T.V. Somanathan, V. Anantha Nageswaran.

Includes bibliographical references and index.

"Discusses both the benefits and the drawbacks of derivatives trading and tries to take a broad view of both theory and practice"-- Provided by publisher

Print version record.

Cover; Half Title; Title; Copyright; Dedication; Contents; List of Tables, Figures and Boxes; Foreword; Preface; Acknowledgements; 1 Introduction; Aims and organization of the book; Notes and References; 2 Definition and Typology; Definition of derivative; Typology; Type of contract; Nature of underlying (risk class); Manner of trading; Possibility of delivery; Linearity of price relationship; Descriptions of derivative securities; Weaknesses in the conventional definition; Are insurance contracts derivatives? Or are some derivatives actually insurance policies?

How is speculation different from gambling?Notes and References; 3 The Economic Functions of Derivatives Markets; Hedging or risk transfer: The primary function; Secondary functions; The specialization function; Price discovery function; Financing function; Liquidity function; Market completion function; Price stabilization function; Socially useful functions of derivatives -- an assessment; Notes and References; 4 Market Completion; The general theory of second best; Criticisms of the theory of second best; Second best theory in the f inancial sector

Second best conditions and derivatives: An intuitive examplePolicy implications of the theory of second best; Conclusion; Notes and References; 5 Derivatives and Price Stabilization; Do derivatives affect spot prices?; The link between futures and spot prices; Extent and nature of the links between spot and derivatives prices; Other derivatives and the price of the underlying; How derivatives facilitate speculation; Long speculation; Short speculation; Gearing (leverage) in futures markets; The classical view: Constructive speculation; Other sources of stabilizing influence

Empirical evidenceOther derivatives; Derivatives and price stabilization: A summary; Notes and References; 6 Derivatives and Price Destabilization; Economic theory versus political fact: Perception of derivatives as destabilizing; The conventional theoretical case for destabilization; Poorly informed speculators (negative information externalities); Momentum (or movement) trading; Dynamic hedging; Empirical evidence on the conventional theories on destabilization; Newer theories on destabilization; Herd behaviour; Intentional herding; Noise trading

'Financialization' or the effect of commodities becoming an investment classEffect of loose monetary policy; Effects of investment; Empirical evidence on the effects of 'financialization'; Appendix 6.1: The destabilizing effect of dynamic hedging by option writers; Notes and References; 7 The Effects of Derivatives on Prices of the Underlying: A Synthesis; Destabilizing effect of regulatory restrictions on short-side speculation; Implications of rising correlation on commodity investing; An integrated view; Policy implications; Notes and References

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