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your potential loss is limited to the premium you pay to the issuer of the put (plus any possible difference between the price you buy the stock for and the strike price). At the same time, if Ericsson instead rises you get to keep the entire gain minus the premium. By enabling people to insure away most of the risk, options will thus help bring in more capital to the stock market, making it easier for companies to raise capital.

The form of derivative most commonly attacked is credit default swaps, which many have argued should be severely restricted31. The argument for this is more or less the same as the argument against asset backed securities, namely that it encourages excessive risk taking. Yet while it is true that it encourages risk taking, there’s nothing excessive about it. In order for any business investment to take place, someone has to assume risks, since all investments can go wrong. Credit default swaps enables people with high risk aversion to make such investments and in exchange for some of the possible return sell the risk to people more willing to take on risk. This enables a higher level of investments and therefore also more prosperity. The risk taking only gets excessive if some third party, such as government, assumes risk without anything in return., which is the case when central banks artificially lowers interest rates and bails out failed financial institutions.

31 h t t p : / / e c o n o m i c t i m e s . i n d i a t i m e s . c o m / N e w s / I n t e r n a t i o n a l _ B u s i n e s s / U S _ d r a f t s _ l a w _ t o _ c h e c k _ c r e d i t _ d e f a u l t _ s articleshow/4049849.cms w a p s /


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