Derivatives The Wild Beast of Finance

Alfred Steinherr is General Manager at the European Investment Bank in Luxembourg and Rector of the Free University of Bolzano in Italy. He was responsible for the development of the EIB's risk-management and performance systems and for the design of risk hedging.

"This book is a stimulating read with an excellent overview of risk in banking. It can be recommended to anyone who is interested in banking, derivatives and the regulation of the financial sector." (Times Higher Educational Supplement, 17th November 2000)

• Preface to the Revised Paperback Edition Introduction Part I A Look Back 1 Evolution of Finance Venice, April 1470 1 The functions of finance 2 The first step towards managing financial risk: diversification and collateral 3 The second step towards managing financial risk: limited liability, bankruptcy laws, seniority rules, balance-sheet structure 4 The third step towards managing financial risk: creating tradable instruments and liquidity in organised markets 5 The final step towards managing financial risk: derivatives and financial engineering 6 Could the acceleration in financial innovation since 1970 have been predicted? 7 Conclusion Notes 2 The Americanisation of Global Finance Minnesota Banc Corporation 1 The emergence of the American model of finance 2 The crowning achievement: risk-management finance 3 Maintaining market liquidity: the sine qua non of the "American model" 4 Global finance: the result of exporting the "American model" 5 Conclusion Notes 3 Dramatic Events How George Soros sees it 1 The EMS crisis of 1992-93 2 Metallgesellschaft: in the red or in the black? 3 Barings: victim of high-leveraged speculation and loose controls 4 Bankers Trust: caveat emptor 5 David Askin: the fallen star of the mortgage-backed securities sky 6 Instability in emerging markets: Mexican tequila 7 Hedge funds and the collapse of LTCM 8 Conclusion Notes Part II Derivatives and Their Markets 4 The Revolution in Risk Management Farming for the future 1 What can derivatives achieve? 2 Price discovery and volatility 3 Is risk management a fundamental corporate objective? 4 Risk management: science or fad? 5 Risk management: some examples 6 Conclusion Notes 5 Mutualisation of Risk on Exchanges Chicago's other side 1 Evolution of exchange-traded financial derivatives 2 Organisation of the exchanges 3 What makes a successful exchange-traded contract? 4 New product developments on the exchanges 5 Exchanges for a global market 6 Conclusion Notes 6 Customised Risk Management in OTC Markets How to lose money on a long put when markets crash 1 Market developments 2 Significant bank involvement 3 Contagion risk 4 Regulatory inadequacies for the specificities of OTC markets 5 New developments 6 Conclusion Notes Part III Public Policy Options 7 Are Derivatives a Threat to Global Financial Stability? The global financial crash of October 2002 1 Systemic risk illustrated with the crises in Asia and Russia 2 Derivatives: the dynamite for financial crises 3 Global derivative finance: the fuse for contagion 4 Conclusion Notes 8 Challenges for the Established Financial Order The butterflies of finance 1 The classical paradigm of financial policy 2 Paradise lost 3 Reducing systemic risk: the Basle approach 4 Conclusion Notes 9 A Financial Policy Model for the Next Century The challenge of global money 1 Reform of the international financial system 2 The architecture for regulatory rethinking 3 Risk management through clearing-houses 4 Phasing out the banking franchise and institutional regulation 5 Redefining the relationship between central banks and financial intermediaries 6 Conclusion Notes Part IV A Look into the Future 10 Derivatives: the Future of Finance Antofagasta (Chile), summer of 2020 1 The ascent of institutional investors 2 Ownership and corporate governance 3 Macro futures 4 Real estate futures 5 The end of banking? 6 Conclusion Notes 11 Conclusions 1 The origin of the species 2 OTC versus exchange-traded contracts 3 Americanisation of global finance 4 Risk management: one of the most important innovations of the 20th century 5 Work of the devil or social benefit? 6 Financial structure in the 21st century 7 Shifts of power 8 Crystal ball gazing Glossary References Index