Financial Derivatives: Harnessing the Benefits and Containing the Dangers

The Jerome Levy Economics Institute WORKING PAPER NO. 145

25 Pages Posted: 3 Aug 1998

Abstract

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.

JEL Classification: G13, G18

Suggested Citation

Thorbecke, Willem, Financial Derivatives: Harnessing the Benefits and Containing the Dangers. The Jerome Levy Economics Institute WORKING PAPER NO. 145, Available at SSRN: https://ssrn.com/abstract=112068 or http://dx.doi.org/10.2139/ssrn.112068

Willem Thorbecke (Contact Author)

Asian Development Bank Institute ( email )

Kasumigaseki Building 8F 3-2-5
Kasumigaseki, Chiyoda-ku
Tokyo, 100-6008
Japan

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