Derivative
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A derivative is a tradable security whose value derives from that of an underlying security, also called an underlier or cash instrument,[1] such as a stock or currency. Futures and options are the most common derivatives but the term also includes interest rate and other swaps often described in popular media as "arcane".
Trading in financial derivatives grew so rapidly during the 1990s' stock boom that former Federal Reserve chairman Alan Greenspan in 1999 described their expansion during that decade as "[b]y far the most significant event in finance during the past decade."[2] Such growth, he concluded, meant that "both banks and nonbanks will need to continually reassess whether their risk management practices have kept pace with their own evolving activities and with changes in financial market dynamics and readjust accordingly."
Since then, however, both exchange-traded and OTC derivatives have garnered bad press for their supposed role in recent economic shakeouts, including the credit crunch that resulted from the 2007 collapse of the mortgage-backed securities market. Negative comments from renowned financial traders like George Soros and Warren Buffett have been widely circulated and spawned several conspiracy-theory websites about derivatives and their trading.[3] Such disinformation has been countered by some analysts who have hailed their benefits for financial markets and opposed reactionary regulations.[4]
References
- ↑ Derivative Instrument. RiskGlossary.com. Retrieved on July 22, 2008.
- ↑ Remarks by Chairman Alan Greenspan Before the Futures Industry Association, Boca Raton, Florida March 19, 1999. Federal Reserve. Retrieved on July 22, 2008.
- ↑ Gambling on derivatives. Roy Davies. Retrieved on July 22, 2008.
- ↑ 10 Myths About Financial Derivatives. Cato Institute. Retrieved on July 22, 2008.
