Japanese Equities

CHAPTER 3Topics Derivatives

The word “derivatives” is no longer strange vocabulary even for someone unfamiliar with the financials industry. Derivatives include the totality of the financial tools connected to futures and options, and for outsiders, they conjure the image of something highly mathematical and hard to understand. Due to their complex façade, derivatives are often treated like monsters and blamed for market catastrophes.

The title of this chapter actually has a double meaning. The first meaning is an obvious one: the chapter literally talks about market impact due to derivative instruments, which not only include futures and options but also broader instruments such as ETFs and index‐related strategies. The second meaning is that subjects covered here may not be mainstream topics; in other words, as general investors seek investment strategies in Japanese equities, these subjects may not seem as important as more traditional subjects.

If these subjects are not as important as more traditional ones, then the question is whether these subjects are “noise.” The answer is that these are “noise” sometimes but not other times. Put differently, whether “noise” or not depends on how they are used. The essence of this statement hopefully will become clearer later on, but be that as it may, investors can make their own judgment if, and only if, they know the nature of these subjects.

Even if investors do not trade futures, options, or ETFs, knowing about them should give ...