Completing the Market for Investors
Derivatives provide investment opportunities not available at organized exchanges. Derivatives offer investors with a means to venture into unfamiliar equity markets around the globe at lower cost and risk than the traditional means. OTC derivatives tailored to meet the needs of specific business situations also extend the investment and capital formation opportunities beyond those offered in equity markets.
Tax or Regulatory Advantage
Derivatives offer firms tax planning opportunities by taking advantage of asymmetries in the tax and the regulatory requirements across different countries, markets or securities.(3) Derivatives can be used to issue debt in tax-favored jurisdictions or through a tax-favored instrument to replicate the payment stream of a high taxed jurisdiction or security. Derivatives may also be used by some regulated industries to reduce the impact of certain regulatory restrictions and limitations.
Speculation
Derivatives are also used to speculate on the price of an interest-bearing security, on the value of equity indexes, and on foreign exchange prices. Speculators are motivated by the gains from their speculative positions and by the risk premium they charge for providing hedging services.
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