For some, the word "derivative" is synonymous with everything that is wrong with capital markets, trade for trade's sake, rampant speculation, unrelated to the financial needs of real people. These are some of the charges, which is against the financial derivatives, however, that there is an adequate reflection or a softer side to this apparently irredeemable beast.
The origins of derivative contracts so start with the needs of ordinary people. Farmers inthe Mid-West were in the middle of 1800 with financial ruin due to the volatility of the prices of cereals. At the time they had to pay for seed, plus the cost and it is growing the crops they sell it, given the likelihood of it for a loss. The simple idea of a fixed price in the future, which was locked in a guaranteed profit for the farmer, in fact, the birth of modern financial markets with the first corn contracts on the Chicago Board of bot Trading on 13 März 1851st Of course, so the farmers to hedge the price of corn there needed to be someone willing to offer a fixed price in the future - the speculators. A simple and obvious fact over-all those who want to denounce the forces of the market is considered, it could not without Hedger speculators.
It is noteworthy, however, would more than one hundred years before the concept would consist of forward hedging translate from farming needs and commodities trading in the> Financial correctly. The International Monetary Market (IMM), the world's first currency futures contract on 31st bot December 1974. Once again, the emergence of these early derivative contracts arising from a need to exchange rate fluctuations, such as breaking the international monetary system after World War II Bretton Woods agreement, known to stabilize.
As each new layer of abstraction to increase the existing layers of the world of derivatives trading to include more built and includesOther aspects of financial markets. Thus, as futures on interest rates added to the existing currency futures and futures on gold with the establishment of futures on U.S. government bonds in January 1976.
In the last 30 years the trend has continued with ever increasing complexity. Options on futures in the early 1980s, followed by "over-the-counter swaps and options in the mid-1980s and continuing with credit derivatives in the 1990's and insurance derivativesIn the early 2000's.
What a simple way to hedge the price of maize has become a global market that trades trillions of dollars per day. The interactions and correlations between markets that is used to separate than it is now closely linked, with price shocks rippling from one market to another. The development of computer systems is the most important "enzyme", without which there simply was not possible, the market is growing.
Ironically, it isNow the inability of computer systems for risk management in order to keep pace with the markets that holding back development. The IT system landscape in most investment banks is now very complex and interact with many different systems in a way that is difficult for a human being to understand. Armies of software specialists and consultants receive fragile systems, "if it is not broke do not fix it" is the mantra of many. But a nest of vipers lies hidden, a tangled web of fragmentedFragile relationships and that means trading firms are vulnerable to significant losses due to potential system failures. Operational risks in IT systems has the potential to bring about the collapse of the entire enterprise. The time is going to meet for many banks in order to tackle this problem, and at the base. Instead, more and more patches to existing systems, is a radical remedy the necessary investments and take a structured and well-architected system landscape inBeing.
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