What Is a Derivative and What Are Two Reasons Why

question 98

Essay

What is a derivative and what are two reasons why parties would enter into a derivative contract?

---

Definitions:

Cost Of Bargaining

The expenses, in terms of both time and resources, that are involved in reaching an agreement in a bargaining process.

Property Rights

Legal principles that define the ownership and use of resources, including the ability to transfer, exclude, and derive benefits from them.

Coase Theorem

A theory asserting that if property rights exist and transaction costs are low, externalities can be efficiently resolved through private negotiations regardless of the initial allocation of property.

Externality

An indirect outcome or repercussion of business or industrial activities that impacts external entities without being accounted for in the pricing of the involved products or services.