Derivatives are Not Evil
Are Derivatives Really to Blame?
Derivative securities are not inherently evil, though the media would have you think otherwise. It seems that any
type of investment that does not directly involve commodities is an easy target these days.
But derivatives are just another type of investment, those whose value is derived from some underlying security or asset or event. Insurance is a type of derivative investment, as a matter of fact. If the bad event happens (a car accident, flood, or fire, for example), then a claim is made against the policy. If not, the policy expires. The value of the policy is derived from the insured asset or event.
If derivatives are bad, then so too is insurance. If derivatives are bad, then so too are leases with the option to own. If derivatives are bad, then so too is the equity in any type of company, small or large, private or public, including those that produce real products and commodities, for stock is nothing more than an option to buy the underlying assets of the company for the price of the face value of its debt. If derivatives are bad, then so too are convertible securities and most every other type of financial innovation we’ve witnessed in the last 30 years, and for decades to come.
by Sherry Jarrell