t breakdown by product, currency or otherwise.
To the uninitiated, the derivatives survey begs several questions: 1) What are derivatives? 2) What purpose do they serve? 3) How are the risks calculated? 4) What methods of accounting are generally accepted? Those four questions form the organization of the remainder of this paper.
It is, unfortunately, hard to rely on the names of derivatives to determine what they actually are. Loomis (1995) identified the then popular ones as "ratio swaps, periodic floors, spread lock 1 and 2, Treasury-linked swap, knockout call option, Libor-linked payout, time swap, and wedding band 3 and 6" (Loomis, 1995, 50).
Cutting through the miasma of names is aided by the work of Iskandar (1997) who takes the empirical stand that derivatives are nothing more than sophisticated and complicated versions of foreign exchange interest rates swaps which came about in the early 1980s. Iskandar argues that:
A number of bankers have compared credit derivatives to the interest rate swaps market in the early 1980s. If the swap market's evolution is anything to go by, then credit derivatives could become a multi-trillion dollar business in coming years. Ten years ago, nobody wanted to trade swaps because we did not know how to price them. Today, outstanding interest rate swaps are bigger than all government bond markets (Iskandar, 1997, 10).
Since the concept behind derivatives is foreign exchange rates, then the concept really derives from 1971 when America abandoned the gold standard and fixed exchange was replaced by floating exchange. The floating exchange rate gave birth to the need for "hedging" (protecting assets against unfavorable movement). The need to hedge, in turn, gave birth to the concept of exchange rate futures, an idea that the "Merc" introduced in 1972. The "Merc" (Chicago Mercantile Exchange) first listed currency futures and the idea of selling and buying investment ...