Arbitrage, hedging, and financial innovation

I consider the costs and benefits of introducing a new security in a standa rd framework where uninformed traders with hedging needs interact with risk -averse informed traders, Opening a new market may make everyboby worse off , even when the new security is traded in equilibrium, This article emphasi zes cross-market links between hedging and speculative demands: risk-averse arbitrageurs can use the new market to hedge their positions in the preexi sting security, which cart affect liquidity in the old market. More general ly, the availability of such hedging opportunities will influence the strat egies to which traders will direct resources.