Derivatives Don't Deserve Their Bad Name

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Executive Summary

Derivatives are, as their name implies, financial instruments derived from underlying assets, indices or even other derivatives. Their most common forms are forward contracts - known as futures if they're traded on exchanges - options and swaps. A wheat grower, for example, might use a futures contract to lock in a price for its grain and thus protect itself from a plummeting market between planting and harvest. Derivatives allowed users to damp a variety of risks and - even more striking - helped them to weather the 2001 global recession better than many firms did. Simply put, derivatives investments appeared to make these companies less risky than average.

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