BANKS »» REGULATION »» DERIVATIVES »» Dec 14, 2020

A derivative has no intrinsic value in itself. Derivatives are an arrangement or instrument (such as a future, option, warrant and swaps) whose value is dependent on the value of an underlying asset such as commodities, precious metals, currency, bonds, stocks, stocks indices, etc. They usually take the form of contracts under which the parties agree to payments between themselves based upon the value of the underlying asset at a particular point in time. For example: Choose something valuable such as soy beans, petroleum or government bonds, make bets on its future worth, add a contract, and you have a derivative. Derivatives have been called the unregulated global casino for banks. The 2008 financial crisis showed that derivatives make the system much more dangerous by encouraging banks and investors to pile up more and more risk. A derivative contract loses or gains value as the price it tracks changes. When it loses enough value, the bank will demand that the owner pay some money, the dreaded