Controlling Risks in Derivatives Markets
JOURNAL OF FINANCIAL ENGINEERING, Vol 4 No 2, June 1995
Posted: 25 Aug 1998
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: Suggested Citation