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Derivatives: A Twenty-First Century Understanding, Timothy E. Lynch
Derivatives: A Twenty-First Century Understanding, Timothy E. Lynch
Timothy E. Lynch
Derivatives are commonly defined as some variation of the following: a financial instrument whose value is derived from the performance of a secondary source such as an underlying bond, commodity or index. But this definition is both over-inclusive and under-inclusive. Thus, not surprisingly, derivatives are largely misunderstood, including by many policy makers, regulators and legal analysts. It is important for interested parties such as policy makers to understand derivatives, because the types and uses of derivatives have exploded in the last few decades, and because these financial instruments can provide both social benefits and cause social harms. This Article presents …
Gambling By Another Name? The Challenge Of Purely Speculative Derivatives, Timothy E. Lynch
Gambling By Another Name? The Challenge Of Purely Speculative Derivatives, Timothy E. Lynch
Timothy E. Lynch
Derivatives contracts can be used to hedge pre-existing risks, but they can also be used to speculate. This Article focuses on derivatives contracts in which both counterparties are speculators. These “purely speculative derivatives (PSD) contracts” have become increasingly common over the last several years and have notably resulted in the transfer of many tens of billions of dollars from institutions that had invested in the US subprime housing market to a handful of speculators who foresaw the market’s collapse, as well as many billions of dollars in fees to PSD brokers. PSD contracts are problematic. PSD contracts are less-than-zero-sum transactions …