Final answer:
The development of sophisticated financial models to create new securities or investment strategies is known as derivative trading. These derivatives can serve as a form of risk management or speculation, but they can also lead to financial instability if mismanaged.
Step-by-step explanation:
The development of new financial securities or investment strategies using sophisticated models is known as creating derivatives or derivative trading. Derivatives are complex financial instruments that derive their value from an underlying asset or benchmark. Because of their complexity, derivatives are often beyond the understanding of many financial service industry experts and can be a form of speculation, which is the practice of investing in risky financial opportunities in the hope of a quick payout due to market fluctuations.
In essence, various financial strategies involve the creation of such products, which can be seen in capital markets. Banks, firms, and investors actively engage in raising and supplying capital, and in the process, may use or trade derivatives to hedge risks or speculate for profits. While derivatives can offer a form of insurance to reduce risk, they can also contribute to financial instability if not used prudently, as evidenced by historical financial crises where the misuse of derivatives played a role.