CEO’s guide to derivatives
One of my favorite blogs to read is TraderPsychology written by Physician and Trader Dr. Bruce Hong. He writes clearly and discusses key issues in psychology, behavioral finance, and economics. Below is a recent article I found on the TraderPsychology Blog titled “A ceo’s guide to derivatives”. Given the importance of derivatives and the recent financial debacle the article is a nice refresher course on how to avoid blowing up your company’s finances.
Article Introduction (Via TraderPsychology)
If you read the article, you will see that it argues that the correct use of derivatives (with their tremendous leverage) as instruments to reduce risk. Instead, it became ever more attractive as an investment vehicle. Instead of using them to reduce risk, they began using them to increase profits. That was the attraction of all that leverage. But, because they didn’t understand the full risk that they were undertaking, they couldn’t estimate the proper amount of capital reserves that they would require. After all, if you have a bundle of a thousand mortgages, all rated AAA by Moody’s and Standard and Poore’s, why bother to look at each individual mortgage and see what they were really made up of?
Click here to read the CEO’s guide to derivatives
Relevant articles (via Trader Psychology)
