Question 3 10 marks Provide one counterargument that the inc

Question 3 (10 marks) Provide one counterargument that the increase volatility in stock price is (10 marks) mainly due to the trading of derivatives. Also, do you agree with the opinion that high volatility in the price of derivatives such as futures and options is a bad thing to financial markets?

Solution

The increased volatility in stock prices are not only affected by trading in derivates but it is affected by various other factors:

The high volatility in the prices of derivates is not good for the financial markets. The participants do not want to lose money and want all the bets to be off which is practically not possible. This makes the business more risky. Very few people and organisations are able to take the advantage of the volatility in the prices of derivatives. The investors lose confidence in the market which ends up in the negative impact on the financial markets.