User:Jukeboksi/Draftspace/Reverse financial instrument

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Reverse financial instruments are used in reverse trading where you are betting that the price of a share, debt bond or currency will fall, not rise, from your estimate, which makes you profit.

Unlike in traditional investments where maximum loss is 100% of invested capital and the gains usually remain in 1 or 2 digit zone (and even as high as 3 digit (mostly achieved in IPOs) but not 4 i.e. thousands of percent in practice) even though there is no theoretical upper limit to the wins, in reverse financial instruments the maximum gain for the buyer approaches infinity, the maximum loss for the seller approaches infinity as well which, combined with other factors, such as overheating of the real estate and debt markets, can cause the system to meltdown like happened in Iceland, Ireland and USA in the early 2000's. The maximum gain for the seller of the put approaches 100% of the put price which may be -50% or -70% or +200% or +300% etc. i.e. over or under of 100% of the current price.

It should be noted and stressed by economists that reverse financial instruments provide insurance facilities for businesses and thus banning them would have adverse effect.


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