i dont think there are problems with derivatives per se, but how we use them. if one wants to take risks and buy naked derivatives, it is his wish, but corporates and especially banks, whose business is to use derivatives ONLY to hedge their exposure cannot do so. there needs to be strict disclosure and regulation for derivative transactions and speculative transactions. However, given that there is such a huge, leveraged, unwarranted exposure to derivatives, it might lead to a massive crash in the financial system in case something bad happens. Investors in derivatives need to understand the risks involved in derivatives. Banks and corporates will surely refrain from such gambling if proper disclosure is made mandatory, because shareholders will be up their asses if they take unnecessary risks. ICICI needs to come clean with their exposures and so do the other banks. That said, the average investor needs to be much more alert and aware of the financial systems to atleast mitigate some impending losses that his/her portfolio might have to take.
