THE MARKETING AND ACCOUNTING OF NEW FINANCIAL INSTRUMENTS
On January 28, 2000, the London Financial Times ran an article entitled "Entry Fee Starts at $20 bn" that began "Banks are doing very nicely from the explosive growth of the derivatives markets in all its forms. Although competition is fierce, some 10 to 20 banks are emerging as the powerhouses driving the industry worldwide" ("Entry Fee," 2000). By best estimates, companies and banks around the world are involved in some 52 trillion dollars (US) worth of financial derivatives (Geer, 1997, 52). Financial derivatives, as will be explained later in this paper, are financial transactions that multinational companies engage in to protect their investments in foreign countries.
In December, 1999, the semiannual market report issued by the International Swaps and Derivatives Association (ISDA) revealed that worldwide growth in the use of privately negotiated derivatives (measured by using the notional principal of outstanding transactions) slowed to 3.4% in the first half of 1999. In derivatives accounting, the notional amount is used to measure volume but not risk, and that amount was $52.711 trillion at June 30, 1999. That figure had grown from $50.997 trillion six months earlier and $36.974 trillion one year earlier.
"The slowdown reflects the return of credit and currency stability from the exceptional volatilities associated with the Asian crisis, the Russian bond default and other events in the previous two years. The period witnessed vigorous growth in newer hedging products such as credit and energy derivatives, but these as yet account for a minor portion of the business" (Montag, 2000).
The ISDA survey, with only minimal watchdog abilities, is compiled and overseen by Arthur Anderson, which totals the combined outstandings in interest rate swaps, currency swaps and interest rate options which the association's members report as a single statistic withou...