Globalization and technological advances have also significantly impacted deriva

Question

Globalization and technological advances have also significantly impacted derivatives markets since 1990. What are the benefits and risks of these changes? How can government authorities or the financial professions take additional actions in this area?I need an expert that can answer this question in another way than the answer on this site!

"Globalization has meant that capital from many parts of the world can flow to write and purchase derivatives related to a myriad of securities, real-options. It means not only exchange traded derivatives can be used by global investors, but the OTC market and customization market can also get participants with many different risk-return preferences and size.

Technological advancement means price-information gets disseminated all over the world in a few seconds. Also, trade execution in certain markets takes place within an ultra-short span of placing an order.

The benefits of these changes are more efficient markets, more transparent risk-pricing and more complete markets.

The risks are that markets become very volatile, increase in size of derivatives markets means any contagion can spillover to other financial markets or even real economy.

Governments should put in place mechanisms which ensure that small investors do not suffer from any market rigging by large players. Central banks should keep excess volatility and liquidity in check. Government should ensure that defaults are adequately punished for and the system does not imbibe moral hazard."

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Explanation / Answer

With Globalization and Technolgy advances, the financial world has come closer with reduction in barrier and closing in the information gap. The major benefit accrues to equity and derivatives market in terms of ease of access which results in increase in volume. The increase in volume in terms of more participants taking active participation in derivatives markets lead to market efficieny and better price discovery. Various other asset classes and underlying securities which are earlier unknown to common invsetors are now accessible through advent of technology. However with ease of access, there lies an inherent risk of inconsistent buying behavior and failure. There lies a greater responsibility with Financial Professional Advisors and with Government Agencies as regulator. Investor Education and Investor protection is the need of the hour to understand and facilitate efficient use of technolgy. Regulators should work on developing consistent regulatory framework to mitigate the risk of systematic failure.

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