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How to treat financial derivatives?
The financial tsunami inadvertently brought the public and financial derivatives into close contact. Some people say that this financial tsunami is a great popularization of financial knowledge, and it is true. For a long time, financial derivatives, the high-end products in the financial market, have been puzzling. In the eyes of the public, this is a game between mathematicians and rocket scientists. The financial tsunami shocked the public's eyes, forcing it to put down its posture, bend over and get into the streets, and was pointed at by thousands of people. In recent years, derivatives seem to be involved in every financial disaster. For example, in the Southeast Asian financial crisis of 1998, Long-term Asset Management Company, the flagship of American hedge fund with derivatives as its main tool, was on the verge of bankruptcy, forcing the US government to rescue it. Scholes and Merton, two senior consultants of the company, were humiliated before the Nobel Prize trophy was finished. Cao (Singapore) suffered a huge loss of $550 million in oil derivatives speculation, and its president, Chen Jiulin, was jailed. At the beginning of this year, a computer genius at Societe Generale played with financial derivatives in a whimsical way. His huge loss of $8 billion dragged the second largest bank in France into the abyss, and even caused the global stock market to plummet that day. Financial Derivatives: Devil or Angel? (Author's title) In fact, the crime is not in derivatives, but also in users. So, what are derivatives? Derivatives are not far away from us. Thousands of years ago, when our ancestors married their children, they formed a derivative contract-forward; When a family promised a scholar, if he was admitted to the scholar, he would marry his daughter, and the scholar got another derivative-option. The first derivative exchange in the modern sense in the world is the Chicago Mercantile Exchange (CBOT), which was established at 1848. In the early days, it mainly traded agricultural futures (10.56, -0.63, -5.63%). Chicago is located on the south bank of the Great Lakes, with fertile land and developed agriculture in the surrounding Mississippi River basin. At that time, there were many farms and agricultural products processing enterprises on both sides of the river. These farms engaged in planting and breeding are facing the risk of falling product prices at harvest, while processing enterprises taking agricultural products as raw materials are facing the risk of rising raw material prices. In this way, both farms and processing enterprises are willing to sign sales contracts in advance to lock in the transaction price of agricultural products at harvest time, thus reducing or even eliminating the market risks faced by both sides. When this demand increased, they decided to set up a trading market. Thus, the Chicago Mercantile Exchange came into being. For more than a century, derivatives trading has been limited to commodity futures, including agricultural products, metals and energy futures. Financial derivatives came into being in the early 1970s. At that time, the end of the Bretton Woods system brought exchange rate risk to international trade. In order to provide enterprises with hedging tools, CME took the lead in introducing exchange rate futures. This is the first financial derivative. At the same time, a more powerful financial derivative option was listed on CBOE for the first time. The emergence of options has caused revolutionary changes in the financial field. Since then, finance has entered the option era. Option is a derivative that is essentially different from futures. The rights and responsibilities of both parties to the contract are asymmetric, and their income is nonlinear with the price of the underlying assets. Therefore, it is more flexible and can be used to construct various income risk structures. Options provide investors with powerful risk management tools and various financial products. At the same time, because of its complex pricing structure, options also introduce all kinds of advanced mathematics into the financial field, making finance more and more difficult for ordinary people to understand. After more than 30 years, financial derivatives have exploded. At present, the scale of the derivatives market is 10 times that of the global stock market, and the varieties of financial derivatives are also dazzling. The underlying assets of derivatives include stocks, stock indexes, interest rates, exchange rates, commodities, credit ratings, real estate indexes, and even temperature, snowfall and exhaust emissions. Derivatives contracts include forwards, futures, options, swaps and various structured financial products constructed by various derivatives, among which there are many non-standard options (also known as exotic options).