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Financial Derivatives: Harnessing the Benefits and Containing the Dangers

  • Willem Thorbecke

Financial derivatives have harmed or destroyed numerous financial firms, nonfinancial firms, and municipalities in 1994 and 1995. This paper discusses the dangers of derivatives and also their benefits. It then considers policies that will maintain the benefits while containing the risks. These include improving the accounting framework used to disclose derivatives transactions, increasing transparency between dealers and end-users, and reducing legal uncertainties between countries. This paper also argues that the government needs to make a concerted effort to acquire more information concerning the dangers that derivatives trading pose to the financial system. If such a study revealed that the systemic risks are too high, then remedial legislation regulating the safety and soundness of nonbank derivatives dealers would be required. Until such a study is conducted, the government should seek to improve the in-house risk management techniques used by major players in the derivatives market.

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Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_145.

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Date of creation: Aug 1995
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Handle: RePEc:lev:wrkpap:wp_145
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  1. Gary Gorton & Richard Rosen, . "Banks and Derivatives," Rodney L. White Center for Financial Research Working Papers 6-95, Wharton School Rodney L. White Center for Financial Research.
    • Gary Gorton & Richard Rosen, 1995. "Banks and Derivatives," NBER Chapters, in: NBER Macroeconomics Annual 1995, Volume 10, pages 299-349 National Bureau of Economic Research, Inc.
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