These derivative markets allow hedgers to avoid risk by transferring it to speculators who seek it. We have all heard the phrase "keep your options open" and it is along these lines that the Options derivative has arisen. As we know opti

Barings bank collapse brought about concerns over the regulators ability to supervise the financial institutions, however a closer look at the details allows us to come to a conclusion as to whether more regulation could have helped. Even though the majority of the losses came from stock index futures it seems to have been their misuse and not their nature that caused it. The problem at Barings was the failure to segregate important jobs and supervise their internal control properly, it was unfortunate to have a dishonest employee in charge but that is besides the point. From what we see at the bank we would think that no extra regulation is needed but, would better supervision from outside have prevented the company from self-destructing ? The answer seems to be yes, and that is why those for increasing restrictions believe we need more international harmonisation in this area, it is surprising that even after the collapse of Barings the British regulators did not get any real information from the Singapore regulators. They believe different treatments and supervision is not acceptable for such a difficult area to police.

From what we have discussed it seems clear why derivatives have cause for concern. They are very difficult to understand and as a result many are investing in them without enough information before hand. The advantages do outweigh the disadvantages when it comes to futures and options and therefore we could argue that it should be left up to the investor to decide what to do with his / her money. The problem gets worse when we come to the issue about more or less regulations and or restrictions.

- Purchaser is forced to go through with the futures contract even if this is detrimental to them as mentioned earlier potential loss is unlimited.

After having weighed up the advantages and threats from the use of futures and options contracts to the trader and especially to the investor we must now turn our attention to discussing whether or not further regulation and/or restriction is required. The concept of options being risky and speculative is not new and therefore its dealing was officially banned on the London Stock Exchange in the late 18th and early 19th century and for a short time in the mid 20th century. This proves to us that the issue over the regulation, and / or restriction of derivatives, especially options and futures is not at all a recent one. However the case for more restriction has been strengthened in this last decade by massive losses being incurred by companies such as Barings Bank (L860m) and the German industrial and chemicals trading group Metallgesellschaft ($1300m).

- The high degree of leverage common to derivatives.

- Edwards, W.H.W, Key Financial Instruments; Understanding motivation in the World of Derivatives

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Disadvantages Options, Danger FT, Clearing House, Futures Options, Stock-exchange LIFFE, Frank Partnoy, L860m German, , Stock Exchange, Barings British, futures options, futures contracts, underlying security, call option, options contracts, contracts advantages /, contracts advantages, advantages /, / disadvantages, future contracts, secondary market, types derivatives called, derivatives called futures, blood water wall, called futures options,
Approximate Word count = 2175
Approximate Pages = 9 (250 words per page double spaced)