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Derivatives : Financial Weapons Of Mass Destruction

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CHAPTER I: INTRODUCTION During the last 30 years, derivatives have become increasingly important and widely used in the field of finance all around the world. Their increasing values made them impossible to be ignored because they have become much bigger than the stock market when measured in terms of underlying assets in so much that Global corporations and financial intermediaries trade billions of dollars of derivative contracts on a daily basis across a range of products and markets (Batten and Wagner, 2012). However, some critics pointed out that “derivatives implication has contributed in the collapses and bankruptcies of financial institutions such as Barings Bank in 1995, Long-term Capital Management in 1998, Enron in 2001, Lehman Brothers and American International Group (AIG) in 2008” (Michael Chui 2012). Even Warren Buffett argued in 2003 that “derivatives are financial weapons of mass destruction that could harm not only their buyers and sellers, but the whole economic system” (News.bbc.co.uk, 2003). Thus it is noticeable that opinions about derivatives are biased. Therefore, throughout this work, I will aim to investigate at the differences between future and option contracts with a critical analysis on the evidence presented. The work will be divided into 3 parts which are Chapter 2, chapter 3 and the conclusions. The chapter 2 will about literature review where will be discussed the definitions of futures and options contracts as well as their differences
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