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Derivatives What are derivatives? Are they anything more than side bets on financial markets becoming increasingly more like casinos? Actually, derivatives are simply financial contracts whose price is derived from that of some underlying asset. While derivatives, properly used, play an important role in managing financial risk, their misuse presents an ever present danger. Whatever derivatives are, there are a lot more of them and they are growing by leaps and bounds. In today's financial world, derivatives have to be reckoned with. An excellent place to find introductory and basic information on derivatives is the Financial Policy Forum's Derivatives Study Center. Another credible source of information is the Center for International Securities and Derivatives Markets (CISDM). Economic Derivatives Institutional investors have been able to hedge or speculate on the release of key economic indicators such as GDP, weekly initial jobless claims, inflation, international trade balance, etc. Similar opportunities are now available at HedgeStreet, where retail investors are offered scaled down contracts on such things as real estate prices, the cost of gasoline and mortgage rates. MacroMarkets LLC is developing Macro securities (MACROs) designed to track the performance of a benchmark index, price, value, or economic indicator. Event Markets The Internet has opened up the opportunity for individuals to trade on a wide range of possible events, such as Hilary Clinton's nomination for president, the onset of bird flu in the United States, you name it. Check out the possibilities at Intratrade. Housing Futures and Options For many Americans, their home is their most valuable asset. But how to protect it? The Chicago Mercantile Exchange is launching a series of housing options and futures based on the S&P Case-Shiller Metro Area Home Price Indices. Options and Futures An excellent basic description of options can be found at Investopedia. Commodity Futures Trading Commission is the government agency for regulation of commodities futures and options markets. The Options Industry Council, a trade sponsored organization, was created to educate the public and brokers about exchange traded options. The site offers a vast array of options information and resources. The Commodity Research Bureau has provided commodity research and data since 1934. The major exchanges: Chicago Board of Trade, Chicago Board Options Exchange, Chicago Mercantile Exchange, New York Board of Trade, and New York Mercantile Exchange, all provide extensive data and educational information on options and futures. Iowa Electronic Markets are real money futures markets in which payoffs depend on economic and political events, ranging from actions of the Federal Reserve to election results and movie box office receipts. Interestingly, the Influenza Prediction Market has had greater success than the Center For Disease Control in predicting flu outbreaks in Iowa. Plans are to extend the market to the entire U.S. A Chicago company, Sports Reserve, has opened up an options market for tickets to major sporting events. You can buy an option, called a "Fan Forward," to purchase a ticket to a major sporting event for a particular team. Structured Products A deluge of new investments with such names as "equity indexed annuities," "equity linked certificates of deposit," "principal protected notes," and the like are being offered by banks, insurance companies and brokerage firms. The unifying characteristic of such investments is that they offer some kind of guaranteed return of principal in addition to an investment return. If "having your cake and eating it too" sounds too good to be true, maybe it is. |
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