The Easy Case for Derivatives Use: Advocating a Corporate Fiduciary Duty to Use Derivatives

Abstract

This Article hypothesizes that directors have a duty to shareholders to investigate and evaluate how derivatives could minimize risk to their organization. Even more, corporations have a duty to use derivatives if overall portfolio risk will thereby be reduced. Part I of this Article defines and describes the major types of derivatives and explains how and why they are used. Part II investigates the risks of derivatives, comparing these risks to other investment instruments. Part III introduces a new conceptualization of derivatives through exploration of three issues surrounding their use: (1) brokers' liabilities to investors when financial losses result; (2) corporate liability to shareholders for losses; and (3) the possibility that in certain contexts, a corporation has a duty to its shareholders to use derivatives to manage business risk. Part IV proposes a risk management strategy designed to minimize the inherent risks of derivatives and to maximize their advantages in managing ordinary business risk. Part V concludes with a look to the future of derivatives.

Keywords: Derivatives, Duty, Risk Minimization