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> For instance, suppose I am a corn farmer in Iowa. Derivatives allow me to buy the option of selling X bushels of corn at a specified price Y, on day Z. Hence,

by rue 17y ago

> For instance, suppose I am a corn farmer in Iowa. Derivatives allow me to buy the option of selling X bushels of corn at a specified price Y, on day Z. Hence, I have a guaranteed revenue at some point in the future. Hm. Firstly, I do not think that is what "derivative" means, leastwise in common economic parlance. Derivatives would be products to other parties based on the various futures/options/insurances/promises-to-buy schemes. > Thus, I can allocate my capital more efficiently because uncertanty has been reduced. Wealth is created. Well, no, you have successfully severed your production from even that most tenuous of connections to reality which is supply and demand, and created money where none should exist (naturally it is arguable that the s&d ratio would be different and there would exist wealth if the financial sector was not mired in these schemes to begin with.)

TriinT 17y ago
"I do not think that is what "derivative" means, leastwise in common economic parlance." Last time I checked, put options were considered derivatives. After all, a put option is basically a contract whose value is derived from the price of a certain security / commodity (in this case corn) at a certain point in the future. Depending on the price of corn, the buyer of the option will choose whether or not to exercize the right to sell the agreed ammount of corn. "and created money where none should exist" None should exist? Why not? If I know I will earn Y dollars on day Z, I can plan my investments better. Instead of delaying the purchase of a new tractor, I can buy it at the most appropriate time because I don't need a money cushion to damp any effects a falling price might have on my business. One of the biggest challenges of running a business is forecasting demand. Using derivatives, you can at least guarantee a revenue stream and transfer market risk to whoever is more qualified to handle it.

by rue 17y ago

TriinT 17y ago

"I do not think that is what "derivative" means, leastwise in common economic parlance." Last time I checked, put options were considered derivatives. After all, a put option is basically a contract whose value is derived from the price of a certain security / commodity (in this case corn) at a certain point in the future. Depending on the price of corn, the buyer of the option will choose whether or not to exercize the right to sell the agreed ammount of corn. "and created money where none should exist" None should exist? Why not? If I know I will earn Y dollars on day Z, I can plan my investments better. Instead of delaying the purchase of a new tractor, I can buy it at the most appropriate time because I don't need a money cushion to damp any effects a falling price might have on my business. One of the biggest challenges of running a business is forecasting demand. Using derivatives, you can at least guarantee a revenue stream and transfer market risk to whoever is more qualified to handle it.