Financial sector attracts a lot of brilliant talent nowadays. In India, I guess, the brightest people of any batch go to finance from the MBA program. No doubt, there is the lure of the lucre, but aside from that there is also the thrill and the intellectual pursuit involved in growing money.
I guess one cannot distinguish a lot of trading which goes on now from a gambling game. In a gamble, people take risks and they get rewards in proportion to that. If I bet on a horse in a derby which has very low odds of winning and if it wins then I get much more than if I would have on betting on the favorite. In the same way, in the markets people take risks and make huge profits when they are right. The attraction of instantaneous gratification and the thrill of knowing that you outwitted the rest of the competitors can be a very powerful motivating factor for someone to do finance.
Derivatives are an instrument of trade, where the trade is done on a contract. These are derived from some asset like commodities, energy etc. But when one buys derivatives we are not buying the asset but usually we are buying a commitment from someone that he will give us that asset at a certain time at a certain place and at a certain rate. There are a lot of other combinations of these kinds and they require a lot of imagination and creativity to be designed and also to avoid into their trap!
What these instruments do is that they reduce the risks of doing business. For example, a farmer may hedge(technical term) his yield of crop next year by entering into a contract at the exchange for someone to buy it at a fixed rate. Now if the next year, there is a shortage and the price rise then he loses since he has to pay the fixed amount. But if there is an abundance and the price fall, he benefits and he gets the price of the hedge. For the buyer too, its a win-win since he knows beforehand what the price he has to pay and if it falls he does lose but he insures himself against the case where the price rise.
Derivative trading has grown phenomenally in recent years. But not all people are very happy with this. One prominent critic of this is the wizard of omaha, Warren Buffet. Here is what he thinks about this.
I guess one cannot distinguish a lot of trading which goes on now from a gambling game. In a gamble, people take risks and they get rewards in proportion to that. If I bet on a horse in a derby which has very low odds of winning and if it wins then I get much more than if I would have on betting on the favorite. In the same way, in the markets people take risks and make huge profits when they are right. The attraction of instantaneous gratification and the thrill of knowing that you outwitted the rest of the competitors can be a very powerful motivating factor for someone to do finance.
Derivatives are an instrument of trade, where the trade is done on a contract. These are derived from some asset like commodities, energy etc. But when one buys derivatives we are not buying the asset but usually we are buying a commitment from someone that he will give us that asset at a certain time at a certain place and at a certain rate. There are a lot of other combinations of these kinds and they require a lot of imagination and creativity to be designed and also to avoid into their trap!
What these instruments do is that they reduce the risks of doing business. For example, a farmer may hedge(technical term) his yield of crop next year by entering into a contract at the exchange for someone to buy it at a fixed rate. Now if the next year, there is a shortage and the price rise then he loses since he has to pay the fixed amount. But if there is an abundance and the price fall, he benefits and he gets the price of the hedge. For the buyer too, its a win-win since he knows beforehand what the price he has to pay and if it falls he does lose but he insures himself against the case where the price rise.
Derivative trading has grown phenomenally in recent years. But not all people are very happy with this. One prominent critic of this is the wizard of omaha, Warren Buffet. Here is what he thinks about this.
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