via AlterNet:
Posted by devonawalker at 12:10 pm
April 22, 2010 1
Derivatives 101: All you really need to know in plain EnglishA lot is being said about the derivative market: How to regulate it? Why not ban it entirely? Regulate only over-the-counter derivatives?Well, here’s a little basic information.
Derivatives are basically insurance policies. Let’s say a farmer wants to lock in the price of grain at the beginning of the year so that he’ll save money in the long run if the price of grain does go up. The derivative would be the insurance purchased on that transaction. The farmer might want to purchase this insurance, betting that he’s right. But the growth in the derivative market comes from the opportunity for anyone to purchase insurance on that same transaction.
A derivative gets its name because its value is derived from something else, typically another contract, or deal. It’s entirely unregulated and has a market of about 20 times the size of the American economy.
Financial reform proposals seek to regulate this market by bringing it out into the open.
“A healthy financial future requires that we bring comprehensive reform to the over-the-counter derivatives markets. It is critically important that we bring transparency to this market and address the significant information advantage enjoyed by Wall Street,” Gary Gensler, the chairman of the Commodity Futures Trading Commission said. .........(more)
The complete piece is at:
http://blogs.alternet.org/speakeasy/2010/04/22/derivatives-101-all-you-really-need-to-know-in-plain-english/