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I was studying the topic of derivatives for an exam. It was interesting - the whole point of derivatives was to prevent the fact that markets are volatile. So

I was studying the topic of derivatives for an exam. It was interesting - the whole point of derivatives was to prevent the fact that markets are volatile. So its a way to "Price Fix". That is the entire point of markets ! to allow free floating of price. I found the whole thing funny, that a market solution lead to the creation of something that was against the entire point of market. What the modern neo-liberals and capitalists will learn - is that there is no perfect system.

666_howitzer 10y ago
I'm sorry to tell you don't really understand how derivatives work, even price fixing for that matter. Prices of derivatives such as forward contracts and options are freely floating and are widely traded. "price-fixing" is defined as a coordinated effort to corner the market, a good example would be when siegel tried to corner onion futures, which lead to creation of "onion futures act". Historically, only few have succeeded in cornering the market. https://en.wikipedia.org/wiki/Onion_Futures_Act https://en.wikipedia.org/wiki/Onion_Futures_Act
lucozade 10y ago
You're conflating the market as a whole and an individual participant in the market. Derivatives aren't intended to prevent volatility in the market as a whole (arguably they can have the opposite effect). What they allow is for a participant to reduce the volatility, to them, of a market price [0]. The advantage to the individual is that they can reduce their exposure to factors beyond their control, that they have no expertise in and/or that they do not wish to actively manage. The advantage to the market is that it encourages more participants. In this context, one can look at derivatives as acting a lot like insurance. It doesn't prevent bad things happening (it doesn't prevent market volatility) but it can cushion their effect on you the participant. The corollary of making such useful tools for hedging risk is that they can also be used for speculation too i.e. gambling. But then again, not all of us registered neo-liberals think the system is perfect. [0] I'm using the terminology in the post I'm replying to. I'm aware that there are derivatives on underlyers other than prices and derivatives that control for factors other than price volatility but I didn't consider that hedging my language (excuse the pun) added any clarity.

666_howitzer 10y ago

I'm sorry to tell you don't really understand how derivatives work, even price fixing for that matter. Prices of derivatives such as forward contracts and options are freely floating and are widely traded. "price-fixing" is defined as a coordinated effort to corner the market, a good example would be when siegel tried to corner onion futures, which lead to creation of "onion futures act". Historically, only few have succeeded in cornering the market. https://en.wikipedia.org/wiki/Onion_Futures_Act https://en.wikipedia.org/wiki/Onion_Futures_Act

lucozade 10y ago

You're conflating the market as a whole and an individual participant in the market. Derivatives aren't intended to prevent volatility in the market as a whole (arguably they can have the opposite effect). What they allow is for a participant to reduce the volatility, to them, of a market price [0]. The advantage to the individual is that they can reduce their exposure to factors beyond their control, that they have no expertise in and/or that they do not wish to actively manage. The advantage to the market is that it encourages more participants. In this context, one can look at derivatives as acting a lot like insurance. It doesn't prevent bad things happening (it doesn't prevent market volatility) but it can cushion their effect on you the participant. The corollary of making such useful tools for hedging risk is that they can also be used for speculation too i.e. gambling. But then again, not all of us registered neo-liberals think the system is perfect. [0] I'm using the terminology in the post I'm replying to. I'm aware that there are derivatives on underlyers other than prices and derivatives that control for factors other than price volatility but I didn't consider that hedging my language (excuse the pun) added any clarity.