Derivatives and the current state of the US financial system

Some random musings on derivatives PSU SBA brownbag presentation May 14, 2010 A bit on my background Petroleum products purchasing in early 1990s. Jet fuel in airline industry Diesel fuel for wholesaler Designed fixed-price diesel fuel program for fuel wholesaler in 1992-94.

Managed companys fuel price risk by trading in crude oil and heating oil futures and options. Academic career: research on corporate hedging since 1995. Some general overview Derivative Major types of derivatives

Forward contracts Swap contracts Futures contracts Option contracts Trading environment Exchanges Clearinghouse bears credit risk Over-the-counter (OTC) Historically, each counterparty bears the credit risk of other

counterparty. Where do contracts trade? Forwards OTC Swaps OTC Futures Exchanges Options Both

What types of underlying assets trade in derivative markets? YOU NAME IT! Currencies Interest-rate Commodities Credit Equity Arcane contracts (weather, carbon, etc.) Current Issues

Do derivatives pose systemic risk to economies? Basis for AIG bailout counterparty in many credit default swaps (more on this idea later) Derivatives markets will ultimately be more regulated. Should all derivatives be cleared through central clearinghouse?