Uses and Misuses of Derivatives. A Case Study

Amaranth Advisors LLC (Amaranth ) in Canada , Sumitomo Corporation in Japan , Orange County in USA , Caisse d 'Epargne in France , the Italian Bank Italease , Bank of Montreal in Canada , and the latest case involving the French Bank Societe Generale (SocGen , to mention some of the most popular , have elevated this popular notion that the use of derivatives are is indeed the culprit that brings about massive failure and loss of enormous sums of money by companies and government entities

To provide some context about loss , below in table 1 are the top 10

trading losses ever (as noted by Babak . It can be noticed that all except for one , are a results of trading in derivatives

Table 1

According to a Babak in an article published in March 2006

Trading derivatives is like juggling running chainsaws which also happen to be on fire . Unless you know what you 're doing , it will get messy . Each and every one of them started out as a small loss . The only reason why they are up on the board is that they were allowed to balloon into grotesque proportions . If we allow our convictions to overrule our discipline , we 're headed towards the same fate

If anything , such gigantic losses should , dampen conspiracy theories of market manipulation . After all , if someone can 't bully a market with a few billion , then the market is indeed bigger than anyone and everyone

However , this dissertation firmly believes that it is the misuse of this financial instrument , and not derivatives per se , that cause firm failure or large losses . The cases of bankruptcy and severe financial loss reportedly due to derivatives need to be investigated to pinpoint the root cause of these incidents . For example , in Orange County and Barings Investment Bank , investigators found that the massive...