financial derivative 讲义.pdfVIP

emystifying Financial Derivatives By René M. Stulz The Merriam-Webster dictionary defi nes a derivative in the fi eld of chemistry as “a substance that can be made from another substance.” Derivatives in fi nance T work on the same principle. These fi nancial instruments promise payoffs that are derived from the value of something else, which is called the “underlying.” The underlying is often a fi nancial asset or rate, but it does not have to be. For example, derivatives exist with payments linked to the SP 500 stock index, the temperature at Kennedy Airport, and the num- ber of bankruptcies among a group of selected companies. Some es- timates of the size of the market for derivatives are in excess of $270 trillion – more than 100 times larger than 30 years ago. When derivative contracts lead to large fi nancial losses, they can make headlines. In recent years, derivatives have been associated with a few truly notable events, including the collapses of Barings 20 The Milken Institute Review Bank (the Queen of England’s primary bank) and Long-Term Capital Management (a hedge fund whose partners included an economist with a Nobel Prize awarded for breakthrough research in pricing n r e derivatives). Derivatives even had a role in the fall of Enron. Indeed, t s n e g just two years ago, Warren Buffett concluded that “derivatives are r o m l fi nancial weapons of mass destruction, carrying dangers that, while e a h c i now latent, are pote