The Economic Benefits and Risks of Derivative Securities

Keith Sill

Senior Vice President of Research and Director of the Real-Time Data Research Center

January/February 1997

Business Review — Derivative security markets have shown extraordinary growth over the past 10 years. But certain events have raised concern about the risks associated with derivatives trading.

The stock market crash of October 1987 has, in part, been blamed on portfolio insurance strategies that used futures markets. Large losses associated with the use of derivatives by firms such as Procter & Gamble ($137 million), Metallgesellschaft ($1 billion), and Barings PLC ($1.3 billion), and by Orange County, California ($1.7 billion) have led to fear among some market participants that derivatives trading is a very risky activity that could lead to a wide-spread disruption of the financial system.

This article appeared in the January/February 1997 edition of Business Review.

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