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The problem with any argument that starts "the derivatives market is just a betting shop", or a contradiction of that statement, is it's only going to be half right. Derivatives are tools that can be used to reduce ones exposure to risk, or to increase it.
A wheat farmer that wants to lock in a currently-favourable price for his produce can sell a futures contract on his wheat, for delivery at the time of his harvest. By doing so, that farmer has reduced his exposure to changes in the spot price of wheat. If the buyer of that contract is a baker, that baker has locked down the price of his raw ingredient. Everyone wins.
Similarly, a credit default swap (a CDS - one of those much-maligned credit derivatives) can be entered into by the owner of a bond to protect against the bankruptcy of the bond-issuer. The premia that the bond-owner pays insure against the risk that the bond devalues in the light of some credit event.
And yet: the market for CDSs and similar instruments is (was!) much larger than the size of the bond market, in notional terms. Look at the Delphi CDS fiasco if you want to understand why it's a bad thing to have $20bn of CDS outstanding on $2bn of bonds.
If you don't own a bond, and yet you enter into a CDS, you're speculating about the default risk of a bond; if you don't either produce or use wheat and yet you're dealing in wheat futures, you're doing the same on the price of wheat.
So speculation with derivatives is bad, but using them to hedge is OK? But the speculators provide a lot of the liquidity in that market. It's much easier for someone who needs to buy a hedge to do so, and for a better price, when there's a lot of action in the market. What's the value of that? No-one really knows.
What can be said for sure is that decrying all derivatives as 'betting' and the 'unreal economy' is missing at least half the point.
