Derivatives are one of the finest crafts of financial innovation. The use of this complicated and sophisticated instrument is varied and large. But our financial system has witnessed a number of scandals and scams with the involvement of financial derivatives. This article attempts to give a brief idea of derivatives as a financial instrument, its usefulness and its destructive nature.
We view them as the time bombs both for the parties that deal in them and the economic system. In our view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.
The financial scandals and the subsequent bankruptcy of three large corporate houses in America during the period of 2001-02 resulted in a 22% slide, in the Dow Jones industrial average, which shattered the hopes of investors. At the root of these failures, we find a contentious financial instrument called derivatives. To a great extent, the failure of the three US giants Enron, WorldCom, and Global Crossing was caused due to the unscrupulous use of financial derivatives. Derivatives, have played a major role not only in these scandals, but most of the other financial scandals that have taken place, in different parts of the world. The question that arises at this point is whether the derivatives are a lethal element of financial market today? |
