Derivative Thinking



In fact, the editorial presents derivatives as one of the most important innovations in the financial markets in the past three decades. "These instruments are little miracles of financial engineering, permitting investors to take a position, or make a bet, without having to actually hold the physical asset. Rather, the value of a derivative rests on the value of an underlying security or a particular reference" (Derivative Thinking) Accordingly, the most beneficial factor about derivatives is that they allocate investors to break up and manage the specific risks involved. Thus, the derivatives are most helpful in hedging the risk and they strengthen global financial markets by reducing the possibility of failure at one or more major institutions. However, in his comments on the derivatives market, Warren Buffett establishes his ideas about financial derivatives without any confusion. Accordingly, derivatives are time bombs for the parties that deal in them as well as the economic system. After providing an effective explanation of the derivatives, Buffett goes on to substantiate his arguments against the financial derivatives which is an indispensable contribution to the general awareness of the derivatives.