In eight pages the uses and misuses of derivatives are considered in this overview that includes short and long hedging use of futures. Six sources are listed in the bibliography.
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them. In looking at what derivatives are a greater understanding may gained in how they should and should not be used. A derivative is a financial tool that has
a price which will bear a strong correlation with an underlying, or related subject; this may be currency, commodities or other financial instruments. The most popular of the markets
are futures and options. When we consider futures and options, it was futures that brought down Bearings Bank with the unauthorised dealings of a single dealer ; Nick Leeson. The
market for derivatives is very volatile. Like any other traded investment these are subject to the laws of supply and demand. and
these are extremely sensitive to these movement due to the way in which trading takes place. The majority of trading takes place on the futures basis rather that the
actual basis, or spot basis. To understand the correct usage and how misuse can occur, the function and operation of datives needs to be understood.
The aspect of supply can be seen as effecting the price. This means influences which are not under the control of any producer are monitored carefully by commodity
traders. The volatility of prices in general does not have a great deal of effect on the way in which the demand for primary goods fluctuates, as primary goods generally
have a low elasticity. Generally primary goods can be seen as fairly stable markets, as are other primary commodity markets such as sugar and wheat (Brown, 1999). However, in the
currency markets there is a higher level of fluctuation due to the movement of the exchange rates. The futures market is different to