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It's also led to lower costs in just about every industry due to the ability to price obscure contracts and lower risk. An example is airlines need to deal with fuel price volatility when selling tickets now, and, if they take on more risk, they need to price that into tickets. Getting someone to hedge against that lowers their risk. The pricing of such hedges and contracts has led to less volatility for pretty much every industry. For about a decade, as I flew a lot, I met a lot of mid level executives at all sorts of companies. I routinely asked them to describe if their company used any derivative products, and which, and why. I was astounded to learn pretty much everyone did, from pricing plastics, to dealing with international trade variations, to getting financing for projects. There is a reason the derivatives market has a notional value of ~1 quadrillion, and it's not because the people using them are all idiots. Quite the contrary, this value is there because it adds value across every sector of the world economy, and business the world over voluntarily use these products because they deem it in their best interests, which almost universally is because it lowers costs and/or volatility. This [1] claimed 94% of the world's biggest companies used derivatives, and this was in 2009. I'd expect more and more of them to use derivatives over time as more products get priced. All this followed from the ideas in Black-Scholes, for pricing certain contracts, ideas which were later developed to handle all sorts of products. Before this, people did a lot of the pricing mostly by guesswork, making it much harder to design and use all these volatility reducing products. [1] https://derivsource.com/2009/04/23/over-94-of-the-worlds-lar... |