Derivatives

This guide was originally intended to assist students in locating material about what was in 1995 a rather mysterious and arcane subject. Now this guide will be of historical interest and allow one to trace the rapid evolution of the subject. In addition, some new books on derivatives have been added.

WHAT ARE THEY???

Good question. In practically every article derivatives are defined rather unhelpfully as any financial instruments that derive their value from other investments such as stocks, bonds, currencies or commodities. The term "derivative" encompasses a number of different, often exotic, subjects and it is the purpose of this guide to lead you to material relating to them.

WHY THE SUDDEN INTEREST???

Derivatives have been around since the 1970s and generally have been regarded as efficient tools that lend stability to business operations. Corporations typically use them to reduce risk from swings in currency values or interest rate movements. In many ways the current intense scrutiny of derivatives relates to their ability to create risk rather than reduce it. Several companies discovered that it was easy to lose huge amounts on derivatives. Gibson Greeting Cards and Procter & Gamble lost millions in leveraged currency and interest rate swaps, while Metallgesellschaft lost over $1 billion from oil derivatives. Then the decision by Orange County, California to seek bankruptcy protection because of losses from derivatives created considerable interest. As well, other local bodies (and even universities) were reported to have gambled and lost and more publicity was generated (see the very interesting piece, "Local Governments Lose Millions in Complex and Risky Securities" in the New York Times, Sept. 25, 1994, p.1).

HOW DO I FIND ARTICLES ON THE SUBJECT???

At this time, it is not very difficult; practically every issue of a newspaper or business-related publication has an article. For example, in the London Free Press on Jan. 20, 1995 see "Derivatives Worry CIBC Shareholders", p.d6. The Wall Street Journal has consistently covered the Orange County debacle.

To search for Canadian articles, the networked product Canadian Business and Current Affairs is very useful. There are many articles relating to "derivative products" and a few of the more interesting ones are provided below. The Business Library has a good Canadian source that is apparently not indexed on CBCA. See practically any current issue of the TSE publication called Open Interest that is located on the bound periodicals floor.

"Derivatives de-mystified", The Canadian Banker, v.101, Iss.2, March/April, 1994, p.28-33.

"Special supplement on managing risk through derivatives", Benefits Canada, v.15(4) April, 1991, p.S1,S3+.

"The development of financial derivatives markets in Canada", Bank of Canada Review, 1993, p.53-64.

"What's the fuss about derivatives?", Financial Post Daily, v.6(1), Feb. 2, 1993, p.19.

"What's what in derivatives", Financial Post, v.88(1) January 1/3, 1994, p.28.

There are many articles in the U.S. business press and they can be found easily by searching PROQUEST ABI/INFORM. For a very broad indication of the extent of the coverage simply type the following su(derivatives). Some samples:

"Implicit-explicit Runge-Kutta methods for financial derivatives pricing models" Javier de Frutos. European Journal of Operational Research. Jun 16, 2006. Vol. 171, Iss. 3; p. 991.

"The credit derivatives conundrum" Natasha de Teran. Derivatives Use, Trading & Regulation. Jun 2005. Vol. 11, Iss. 1; p. 5.

"Derivatives: Virtual Values and Real Risks" Jakob Arnoldi. Theory, Culture & Society. Dec 2004. Vol. 21, Iss. 6; p. 23

"Pricing and hedging in incomplete markets" Peter Carr, et al. Journal of Financial Economics. Oct 2001. Vol. 62, Iss. 1; p. 131

"Insurers use derivatives as hedges", Cynthia Crosson & Jim Connolly, National Underwriter [Life/Health/Financial Services], v98(19), May 9, 1994, p.21.

"In defense of derivatives", Melamed, Leo, Barron's, v.74(10), Mar. 7, 1994, p.67.

"The CEO's guide to derivatives", Beese, J. Carter Jr.. Chief Executive, Iss. 92, Mar 1994, p.30-34.

"The striking price: too calm for comfort", Thomas N. Cochran, Barron's, v.74(23), June 6, 1994, p.MW12. (historic)

"Trading points: as customers flee from derivatives, Wall Street profits could be crimped", Sandra Ward, Barron's, v.74(23), June 6, 1994, p.MW10

HOW DO I FIND BOOKS ON DERIVATIVES???

Locating books is a little more difficult, partially because the word "derivatives" is quite common in the scientific disciplines where it has a totally different meaning. It is only quite recently that books on the subject of financial derivatives have been classified under "DERIVATIVE SECURITIES". There are two: Complex Derivatives... by Banks and Global Derivatives... by Leach. Many other useful items can be found by using other subject headings such as: "OPTIONS"; "FINANCIAL FUTURES"; "SWAPS"; "INTEREST RATE FUTURES"; "FORWARD EXCHANGE" or "FUTURES MARKET". Books are listed below. See also the useful government report: The Development of Financial Derivatives Markets: The Canadian Experience

Now over 100 books are found under the subject "derivative securities".

All about derivatives: The easy way to get started. M. Durbin. HG6024.A3D87 2006

Analysis of derivatives for the CFA program. D. Chance. HG6024.A3C43 2003

Apocalypse Roulette: The Lethal World of Derivatives. R. Thomson. HG6024.A3T48 1998

Capitalism with derivatives: A political economy of financial derivatives, capital and class. D. Bryan. HG6024.A3B79 2006

Clearing and settlement of derivatives. D. Loader. HG6024.A3L633 2005

Commodity Trading Manual. Chicago Board of Trade, 1989. HG6049.C65

Complex Derivatives: understanding and managing the risks of exotic options, complex swaps, warrants and other synthetic derivatives. E. Banks. HG6024.A3B36

Currency Swaps: A self-study guide to mastering and applying currency swaps. HG3851.C783 1992

Derivatives: the tools that changed finance. P. Boyle. HG6024.A3B69 2001

Derivatives: Valuation and risk management. D. Dubofsky. HG6024.A3D828 2003

The Development of Financial Derivatives Markets: the Canadian experience. Bank of Canada

The Dow Jones-Irwin Guide to Put and Call Trading. H.K. Clasing. HG3881.M335