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In Defense of Derivatives
Report

In Defense of Derivatives

From Beer to the Financial Crisis

Bruce Tuckman
Cato Institute, 2015
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Editorial Rating

8

Qualities

  • Comprehensive
  • Analytical
  • Overview

Recommendation

Derivatives have borne the brunt of blame for the 2008 financial crisis. However, painting derivatives with one broad brush is highly misleading and patently incorrect, according to finance professor Bruce Tuckman. He posits that government-devised rules to avoid another crisis fail to address the true causes of the collapse and may discourage the use of all derivatives, which help businesses manage risk. getAbstract recommends this comprehensive overview of derivatives to regulators, executives, investors and others with an interest in minimizing risks to the financial system.

Summary

Derivatives are essential to modern business, but they’ve come under regulatory fire since the 2008 financial crisis. A derivative is a contractual agreement between two parties “to exchange cash, goods or securities in the future.” Because it calls for little or no payment or margin upfront, a derivative carries “implicit leverage,” which can sometimes backfire for undercapitalized investors and speculators. If one party to a derivative fails or defaults, the other can take remedial action by seizing collateral without resorting to the court system.

A 2009 survey found that 94% of Fortune Global 500 firms hedge risk...

About the Author

Bruce Tuckman is a finance professor at New York University Stern School of Business.

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