Derivative (finance)
파생상품
A financial contract that has no value of its own but whose value depends on another asset (the underlier) or on whether some event occurs. Commodities such as grain and oil, shares, bonds, currencies and interest rates serve as underliers. The main kinds are forwards and futures, options and swaps, and they are used both to protect against price movements (hedging) and to bet large sums with little money (speculation). In the 2008 financial crisis, over-the-counter derivatives such as credit default swaps, traded off any exchange, magnified the crisis.
In depth
A derivative is a contract that fixes in advance what will be bought or sold, when and at what price. If a wheat farmer and a flour mill agree today on a price for wheat to be delivered in three months, neither loses whether the price of wheat rises or falls in the meantime. When such contracts are standardised and traded on an exchange they are futures; when only the right to buy or sell at a set price is traded, they are options. A contract in which two parties exchange different cash flows, such as a fixed and a floating interest rate, is a swap.
Derivatives are not used only to reduce risk. Because one can bet on the movement of a price with a small margin and without buying the underlying asset, they serve as a means of speculation and work like borrowed leverage. In Berkshire Hathaway's 2002 annual report the investor Warren Buffett warned that chains of derivative losses could turn into an economic crisis and called them "financial weapons of mass destruction".
From the 1990s over-the-counter derivatives, made directly between banks and securities firms without an exchange, grew explosively, and the Commodity Futures Modernization Act of 2000 left this trade unsupervised. The derivative that mattered most in the 2008 crisis was the credit default swap (CDS), a contract in which the seller promises to cover the loss if a bond defaults in return for regular fees like insurance premiums. Unlike insurance, it carried no duty to hold reserves, and anyone could buy one without owning the bond, which made it a bet on default. The notional amount of credit default swaps outstanding reached $62.2 trillion at the end of 2007. AIG, which had taken on the default risk of subprime mortgage securities on a massive scale, was rescued by the government in September 2008 on the brink of collapse. Collateralised debt obligations (CDOs), which repackaged and mixed securities built from mortgages, and synthetic CDOs, which copied them with credit default swaps, also made it impossible to know where the risk lay and how large it was.
The "notional" amount of derivatives is far larger than the money actually at stake. In 2010 the notional amount of over-the-counter derivatives exceeded $600 trillion, while their market value was estimated at $21 trillion and their credit-risk equivalent at $3.3 trillion, still about the size of the US government's annual budget. After the crisis the Dodd–Frank Act of 2010 included reforms to move over-the-counter derivatives onto clearing houses and exchanges and to make them reported.