Chapter 5 showed that conventional economic theory was that derivatives, through constructive speculation and improved information, would reduce spot price volatility. Chapter 6 looked at theoretical and empirical evidence that the opposite could be true: that derivatives may destabilize spot prices. This chapter brings together the opposing arguments and arrives at a coherent view.

Conventionally derivatives were thought to have a stabilizing effect because they:

1. • facilitate speculation and speculation was generally felt to have a stabilizing effect;

2. • increase the flow of information and in some cases, facilitate discovery of the future price; speculators – partly by specialization – bring in new and more accurate information; this allows better anticipation of the future and better inventory planning thereby reducing price volatility;

3. • allow spot market traders to hedge their risks and thereby reduce the chance that they would make panic sales at a low price or panic purchases at a high price, in response to an unexpected price change.

Set against these were the reasons why derivatives might have a destabilizing effect:

1. • momentum trading is destabilizing, so derivatives can destabilize spot markets to the extent such trading occurs;

2. • speculators may bring in inaccurate information and in that case their effect on the market is to reduce the level of information; this will worsen anticipation of the future, distort inventory planning and increase price volatility;

3. • though panics are indeed reduced, some hedging products – e.g. dynamic hedging by option writers – actually destabilize prices.