| > Is there a benefit that exotic financial instruments offer that I'm unaware of? They allow traders to trade otherwise untradable items.
On the same token, they allow traders to hedge things that are otherwise un"hedgable". It's important to remember that at it's base a financial instrument is just a legal agreement between two parties. Some times there is an underlying item that it derives it's value from, in this case it's called a derivative. Whether or not you consider this to be a benefit or not is up for debate:) > Otherwise, why is the US government not actively ensuring that these instruments are not allowed unless they are deemed to be a valuable financial tool? Once you understand this you start to understand why the government might not want to get involved. If these instruments are just legal agreements then how could the government get involved with out it getting messy. After all how can the government say that you and I can't make a deal. Under what terms can't we make a deal?
What can't we trade?
Is there a maximum value of a trade?
Can I sell my part of the trade to someone else?
etc... As a side note, I make my living converting these legal agreements into models that can be priced. |