Few topics are as controversial today as derivative instruments. To some, derivatives are simple tools that allow market participants to efficiently and effectively manage their risks. To others, derivatives are weapons that allow market participants to thwart regulations, exceed risk limits, hide market exposures, and threaten the very fabric of the world’s economic system. As with any tool, the answer as to whether the tool is good or bad is determined by the way it is used and who is using it.
A highly trained and skilled teppanyaki chef can wield a razor- sharp knife with blazing speed and thinly slice enough steak for a table of eight in just 30 seconds. A thief can use that same knife to kill and rob a stranger in an alley. The knife itself is neither good nor evil. The same is true of derivatives. If the person using them is a business owner who wants to reduce the risk in a portfolio of stocks in order to increase the odds that his employees will enjoy a comfortable retirement, that’s a good thing. A flow trader at a major bank could use that same derivative to hide risk in an offshore account in direct violation of his firm’s rules, his boss’s instructions, and his jurisdiction’s securities laws. It’s the intent of the person using it that determines whether a derivative is a tool for good or evil.
This book attempts to demystify derivative instruments and to illustrate how they can be used for both good and evil. This book can be used as a classic text by starting at the beginning and working through it to the end. Each chapter assumes the reader knows the material in the prior chapters. This book can also be used as a reference tool, allowing readers to get a quick description about the creation, pricing, trading, and applications of a particular derivative instrument with which they might be unfamiliar.
Enjoy!