How do derivatives alter the exposure of different people in the economy?
Derivatives allow a shifting of risk from a person who does not want to bear the risk to a person who wants to bear the risk. Without derivatives, people suffer risk without much choice. The only investment decision that can be made is whether to be in a certain area of business or not. For example, if a garment exporter dislikes currency risk, the only choice that he faces (in a world before derivatives) is whether to be in garment export or not. With derivatives, he has the ability and choice to insure against currency exposure. And he is able to do this by trading this exposure with others in the economy who are equipped to deal with it.
