Myths about derivatives

In this paper we will present ten myths associated with financial derivatives. These myths are resulted form misconception. Several myths, resulted from misconception, about the derivatives exist in the market.
Those will be discussed below:

(1) Many people think that the financial derivatives are new and very complex in nature. But the fact is that, the derivatives are not at all new, they have existed in the market for many years. In fact, the concept of options, one type of financial derivatives, was found in the Greek philosopher Aristotle’s essays. However, most of the financial derivatives are now days made simple to minimize the risks.

(2) The second myth is related to the user of derivatives. It is generally thought that only the big corporates and banks use derivatives. But the ground reality is, many small firms and regional banks use derivatives. The small regional banks can minimize the risks by using the derivatives. That is, the economic benefits of financial derivatives are independent of the size of the users; both small and big scale organizations may achieve the benefits.

(3) Most of the people think that the financial derivatives are speculative. But the truth is that, many firms have achieved financial growth using the derivatives. The derivative products drive the innovation of new technologies.

(4) The common people think that the financial derivatives only take money from company but not give back anything. The reality is completely the opposite. Financial derivatives reduce the risks, which allows the companies to accelerate their product activities.

(5) Somebody think that the financial derivatives closely linked the market participants together, which increases the systematic risks.

(6) Another misconception about the financial derivative is that it can reduce the value of bank capital.

(7) Many people are concerned about the risks, namely, credit risks, market risks and operating risks associated with financial derivatives. They are used to think that these risks are new, though it is not true. These risks are same like those associated with the traditional financial instruments.

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Last Updated on : 1st August 2013