Derivatives - Derivatives Section 1
36. Which of the following statements about derivatives is least accurate?
- Option : C
- Explanation : Derivatives do not convey any information about the use of the underlying in strategies.
- Option : A
- Explanation : Derivatives regulation is not more and is arguably less than spot market regulation. However, market crashes and panics have a very long history, much longer than that of derivatives.
- Option : B
- Explanation : Derivative markets have greater liquidity than underlying spot markets with lower capital requirements and lower transaction costs.
- Option : C
- Explanation : Derivative markets provide for effective risk management and thus result in payoffs different than those of the underlying. Therefore similar payoffs are least likely to be an advantage to consider. An operational advantage of derivative markets is the ease of going short in comparison to the underlying spot market.
- Option : C
- Explanation : The benefits of derivatives can result in excessive speculative trading and hence cause defaults on the part of creditors and speculators. A is incorrect because arbitrage tends to bring about a convergence of prices to the intrinsic value. B is incorrect because asymmetric information is not itself destabilizing.
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