Controlling Risks in Derivatives Markets

JOURNAL OF FINANCIAL ENGINEERING, Vol 4 No 2, June 1995

Posted: 25 Aug 1998

See all articles by Ludger Hentschel

Ludger Hentschel

Alternative Risk Premia Investments

Clifford W. Smith

Simon Graduate School of Business, University of Rochester

Abstract

The debate about risks and regulation in derivatives markets has failed to provide a clear analysis of what the risks are and whether regulation is a useful tool for their control. The debate is particularly confusing in the area of what has been termed "systemic" risk. This article analyzes the risks associated with derivatives transactions. We argue that systemic risk is just the aggregation of individual default risks. Furthermore, the debate seems to have ignored the most prominent risk evident in recent derivative debacles: what we call "agency risk." After analyzing the risks in derivative markets, we investigate the appropriate role for regulation in controlling them. A shorter, less technical version of this article entitled "Risk and Regulation in Derivatives Markets" appeared in the Fall 1994 Journal of Applied Corporate Finance, (Vol. 7, No. 3, pp. 8 21).

JEL Classification: G13, D81

Suggested Citation

Hentschel, Ludger and Smith, Clifford W., Controlling Risks in Derivatives Markets. JOURNAL OF FINANCIAL ENGINEERING, Vol 4 No 2, June 1995. Available at SSRN: https://ssrn.com/abstract=6668

Ludger Hentschel

Alternative Risk Premia Investments ( email )

1120 Avenue of the Americas
15 Fl
New York, NY 10036
United States

HOME PAGE: http://www.ludgerhentschel.com

Clifford W. Smith (Contact Author)

Simon Graduate School of Business, University of Rochester ( email )

Carol Simon Hall 3-202C
Rochester, NY 14627
United States
585-275-3217 (Phone)
585-442-6323 (Fax)

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