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2000

Law and Society

Derivatives trading

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A Normative Analysis Of New Financially Engineered Derivatives, Peter H. Huang Jan 2000

A Normative Analysis Of New Financially Engineered Derivatives, Peter H. Huang

Articles

This Article analyzes whether the introduction of new derivative assets makes a society better or worse off. Because trading such non-redundant derivatives produces new distributions of income across time and over possible future contingencies, individuals can utilize such financial instruments to hedge risks not possible before the introduction of these assets. Thus, it may seem that new derivatives unambiguously benefit society. In fact, introducing sufficiently many new derivatives completes asset markets. Asset markets are complete if trading on them can attain every possible payoff pattern of wealth across time and over possible future contingencies. The first fundamental theorem of welfare ...