The Danger of Derivatives

In the program "On the Money" from ANC, there was a segment where a representative from one of the local banks was talking about derivatives.

I found the segment disconcerting for two reasons:

1. The program is supposed to be catering to new or potential investors who have none, to little experience in the financial market. Yet the segment host and guest were talking back and forth in language that I am sure would leave their newbie audience with a glazed look in their eyes. A proper explanation that a layman could understand was certainly called for, but it never came.

2. Derivatives were central to the financial crisis in the US that took down institutions like the Lehman Brothers. In my previous post, I mentioned the need for traders and non institutional investors to watch the movie "Inside Job". This is why the way derivatives were once again being promoted gave me some "deja vu" vibes and drove me to write this post.

Clearly, there is a strong need for potential investors and traders to empower themselves with knowledge about the financial market in order to avoid being subjected to terms and instruments that sound impressive, but for all the wrong reasons. At least for those in the know.

In fact the Wall Street Journal mentioned in an article published in mid January 2014 that banks are putting themselves in danger by dealing in derivatives again. The article admonishes those concerned to think back to meltdown of the US Financial system and to remember, the big role derivatives played in that crisis.

Go here to read the article at WSJ

Another, more recent article on the World Finance website asks whether there are still risks in derivatives in the Post Lehman period.

Here is the link to the article

Anyone planning to deal with derivatives ought to read these articles in order for them to properly assess their trading options.

And PLEASE, watch the "Inside Job". Its almost certain that those newbies who watch this will experience a paradigm shift that will serve them in good stead in their future forays into the wild world of finance.