Critical Analysis


Critical Analysis

The two authors have share different opinions about the issue of whether the risks involved in financial derivatives can be managed or not. While Bass considers financial derivatives as the greatest investment risks, and argues that the risks associated with financial derivatives are not manageable, Welby on the other hand, argues that these risks are manageable, and financial derivatives can be great assets if appropriately managed. In Bass’ argument, it is apparent that financial derivatives are dangerous and they should not be applied to use anywhere, as they are capable of vast loses. On the other hand, Welby explains the importance of financial derivatives, and how if appropriately managed, these could be considered assets, in addition to the manageability of their risks.

Both authors identify that all financial derivatives come with risks, which require management, just like other financial instruments. However, these have addressed financial derivatives as some sort of extra-ordinary financial tools. When Bass argues that risks associated with derivatives cannot be managed, this largely reflects a form of ignorance on the overall issue of derivatives. While tackling derivatives, one should approach it as an ordinary financial instrument to avoid coming up with unrealistic assumptions.

Welby makes valid opinions about derivatives, when he argues that the risks in derivatives can be managed if appropriate strategies are employed. This is true because the risks involved with derivatives are not unique from those involved in other financial instruments.

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