While futures and forwards are merely priced by arbitrage, options trading is fascinating in that it throws up new information in the form of the implied volatility, which is the market's view about future volatility. This is something which is not visible before we have options trading but is visible after options trading commences.
In addition to revealing what private agents believe, it is also an excellent free forecasting tool. By now, there is a rich literature which tells us that such market-based measures are forward looking, and are very good forecasters.
In several other situations, financial markets are shaping up as new sources of forward-looking information for the statistical system: this includes market-based measures of inflation expectations, market-based measures of the probability distribution of the decisions of the US Fed in the next two meetings, etc.
Traditionally, it is felt that the Indian license-permit raj in finance induces real costs by virtue of supressing information about the yield curve and the exchange rate. In an article in Business Standard today, I argue that our approach of financial repression induces costs which go beyond the lack of a trusted yield curve and the lack of a trusted exchange rate. The host of information sources which are based on derivatives markets are also lost when policy makers block the development of financial markets. These information sources play a marvellous role in the decision making of private agents and of public policy in mature market economies, but we don't have them in India.
I worry about the illusion of control that goes along with flying blind. In the present situation, we don't observe a market exchange rate or a market yield curve, we don't observe market-based estimates of future inflation and inflation volatility, we don't observe market-based estimates of future currency volatility, and so on. I think that in a developing country, where the economists and the econometric models are weak, the benefits from having market-based forecasts is even stronger than is the case in industrial countries. (Of course, this goes over and beyond the minor matter of not having a decent measure of inflation).
Update: Jayanth Varma has a nice post on the delicious exchange-traded binary option on the Fed Funds rate that's gaining momentum at CBOT.
Coincidentally, today's Business Standard also carried a debate between Bibek Debroy and myself on the subject of capital account convertibility.