The main purposes of the derivatives market are:

a.  Risk allocation, transfer, and management.

b.  Information discovery:

     i.  The derivatives are good indicators of the trends in prices of the underlying assets.

    ii.  These involve less capital, therefore, the information gets reflected in the price faster.

   iii.  Derivatives allow the strategies that are otherwise unavailable with the underlying.

c.  The derivatives have other operational advantages as well, such as:

     i.  Lower transaction cost and more liquidity than spot markets.

    ii.  It becomes easier to go short on the underlying and also provides a better leveraging effect.

d.  Derivatives help in bringing efficiency in the markets:

     i.  When the prices deviate from their fundamental values the derivatives offer a less costly trade, and

    ii.  Ability to hedge increases the willingness to trade.

The main criticism of derivatives trading is:

a.  Derivatives result in destabilization and increase the systematic risk.

b.  Due to the benefits of low cost and leverage provided by the derivatives, it results in excessive speculation and gambling.

c.  It increases the complexity of the transaction.