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Derivatives provided some of the 1990's most devastating financial disasters, but are derivatives to blame?

Hutchinson, Elaine (2007) Derivatives provided some of the 1990's most devastating financial disasters, but are derivatives to blame? Undergraduate thesis, Dublin, National College of Ireland.

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Abstract

"By far the most significant event in finance during the past decade has been the extraordinary development and expansion of financial derivatives. These instruments enhance the ability to differentiate risk and allocate it to those investors most able and willing to take it - a process that has undoubtedly improved national productivity growth and standards of living".
A derivative is a financial instrument whose value is derived from one or more of it's underlying assets.

"One of the great advantages that derivatives provide is leverage. You can control a large holding in an asset for a small amount of money. Since you participate in the gain from the price movement of the underlying asset for a fraction of the cost of the asset, you can significantly increase your rate of return."
Leverage can also cause problems as seen with Orange County and Barings Bank. Throughout the 90's the press was filled with derivative disasters. This is an area the author will be concentrating on. Analysing what went wrong. To stop companies from losing faith, regulations, accounting standards and recommendations were brought in to govern derivatives. It is hoped that these will prevent the disasters from the past occurring again.

The derivatives market is continuing to grow as outlined in appendix A. As long as derivatives are regulated they work very well. It is when they are not that the problems occur. This is the area that the author will be investigating: Are the derivative debacles of the 1990's purely down to derivatives? Are derivatives to blame?

Item Type: Thesis (Undergraduate)
Subjects: H Social Sciences > HG Finance > International Finance. International Monetary System
H Social Sciences > HG Finance > Investment > Stock Exchange
Divisions: School of Business > BA (Honours) in Financial Services
Depositing User: SINEAD CORCORAN
Date Deposited: 22 Feb 2011 15:51
Last Modified: 26 Nov 2014 15:40
URI: http://trap.ncirl.ie/id/eprint/482

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