Speculation on the rise in derivative markets

with+speculators+active+in+the+derivative+markets+firms+using+financial+products+to+manage+risk+may+be+at+something+of+a+disadvantage 3497 800460078 0 0 7001668 300 Speculation on the rise in derivative marketsCorporates that use derivative products to manage their risk exposure could face challenges in the months ahead.

With traditional asset classes like stocks and bonds losing luster, investors are seeking returns in alternative assets. But by speculating on currency or commodity derivatives, speculators may be making the prices of those products more volatile – and volatility is precisely what companies look to limit when they enter hedges.

A recent Financial Times piece on the currency market illustrated the scope of the problem. Paul Inkster, an executive at Barclays Stockbrokers, told the paper that his clients are buying and selling currency derivatives with fervor.

"Our clients have really taken to trading foreign exchange in the last year," Inkster was quoted as saying.

Some in the political realm are decrying the uptick in speculative activity. France's finance minister, Christine Lagarde, recently criticized the trend, telling radio station France Info that speculation in commodity futures was "unacceptable."

Speculators aren't always responsible for steep price run-ups; some of the commodity price spikes of 2008, for example, had nothing to do with speculation. But in a market where speculators are active, companies using derivatives to manage their risk exposure need to stay on their toes.

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