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Last name. Address Line 1. Salomon Brothers arranged for IBM to swap Swiss franc and Deutschemark debt with US dollar borrowings by the World Bank in a deal that was structured to circumvent restrictions on bond issuance. As financial markets liberalized at different speeds in the s, the ability to swap bond proceeds from fixed rate to floating and into other currencies became a key driver of a move towards more open markets. Another watershed came with the establishment of the International Swap Dealers Association Isda in , a trade group that later rebranded itself the International Swaps and Derivatives Association.
Documentation to standardize swap trades and speed settlement came with the development of the Isda master agreement in ; and legal clarity that netting of OTC contracts was enforceable led to spectacular growth in derivatives volumes. The accelerating pace of dealing drew the attention of the great and the good in finance, and in former Federal Reserve chairman Paul Volcker asked JPMorgan chief executive Dennis Weatherstone to form a committee of bankers and other experts from around the world to set out principles for derivatives. Hancock, who would later serve as chief financial officer of JPMorgan and after the financial crisis as chief executive of embattled insurer AIG, also highlights the way that shared technology helped to make derivatives markets more robust.
Trading and Pricing Financial Derivatives
But while the G30 report on derivatives practices in made the market less prone to pratfalls, it certainly did not prevent them. The following year an unexpected interest rate hike by the Federal Reserve prompted what became known as the bond market massacre, which in turn exposed how widely derivatives were used to add leverage — and how frequently end users and dealers alike struggled to appreciate their real risk exposure. Bankers Trust, one of the most innovative dealers in derivatives, became a focus of litigation on charges of selling unsuitable deals.
The contracts were certainly complicated — with shifting leverage at multiple barrier levels embedded — but from the perspective of the derivatives structuring experts this seemed to be a case of buyer beware. It was a very painful lesson for those early innovators.
Derivatives: From innovation to exploitation… and back again?
It was a lesson that foreshadowed the problems that would develop as derivatives attracted employees who were typically more mathematically adept than both their customers and their peers in other parts of the bank. They quickly came to learn that structuring could facilitate highly lucrative arbitrage profits between different contract types, as well as across separate but related market instruments. The legal cases against Bankers Trust — complete with dealing room tapes of employees gloating at the margins they were extracting from ill-informed clients — set a template for the reputational scandals that would plague the derivatives markets during later financial crises.
The turbulence of did not derail the growth in derivatives volumes, however, and the industry was able to fend off attempts to increase regulation in important jurisdictions.
The US became a key battleground in the fight to resist greater oversight. Exchange executives from Chicago were keen to encourage regulators to clamp down on their rivals in OTC derivatives dealing by treating swaps in the same way as listed futures contracts.
OTC dealers found a crucial ally in the form of Wendy Lee Gramm, who was head of the Commodity Futures Trading Commission from to and could have pushed to extend her oversight to include swaps. It was remarkable. A great deal of innovation flourished in that environment and we were able to expand from interest rate and currency swaps into equity swaps and credit default swaps.
Difficult perhaps, but derivatives growth certainly was not reliant on developments in the US. OTC derivatives innovation was flourishing in London, where the market for swapped Eurobond debt was based, and legal setbacks did very little to stem the increase in swap and option activity. Bankers were surprised when the UK courts ruled in that Hammersmith and Fulham Borough Council did not have the power to enter into interest rate swap contracts, invalidating existing contracts with banks and shutting down the market for derivatives trading by local authorities in the UK.
But this had a minimal long-term effect on swap volumes. And a market was developing that was almost entirely based in Europe and Asia, in the form of retail structured products. The market for retail structured products was initially equity based and made extensive use of listed contracts, avoiding the sharp divide between OTC and exchange-traded derivatives that was seen in the US.
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Did you know you can compare your wishlisted programmes with our new Comparison tool? Log in and try it. Continue your search. Deadline passed Unknown. London School of Economics and Political Science. This Finance - Options, Futures and Other Financial Derivatives course at London School of Economics and Political Science delivers the concepts and models underlying the modern analysis and pricing of financial derivatives.
The underlying philosophy of the course is to first provide the firm foundations for understanding derivatives in general. Find Alternative Short Courses. Overview The required technical tools will be explained carefully, allowing students to learn the language and to be able to converse with derivatives professionals.
Reason for using derivatives:
Course outcomes The underlying philosophy of the Finance - Options, Futures and Other Financial Derivatives course at London School of Economics and Political Scienceis to first provide the firm foundations for understanding derivatives in general. Detailed Programme Facts Starting in We did our best, but couldn't find this information online. Languages English.