Derivatives for Decision Makers: Strategic Management Issues

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John Wiley & Sons, Aug 10, 1996 - Business & Economics - 222 pages
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"A brilliantly conceived and lucidly written exposition of the most important topic on the frontier of modern finance. This book takes the mystery out of derivatives. Bravo!"—John H. Langbein, Professor, Yale Law School

"Derivatives for Decision Makers is a first in explaining derivatives to those who need to understand them. It explains what derivatives are, how they can be used as risk management tools, and what managers and decision makers need to know about the subject. Not only is the technical substance superb, but the form is accessible to all decision makers."—Afsaneh Mashayekhi Beschloss, Director, The World Bank Group

"Derivatives for Decision Makers is an excellent resource for both users and providers of derivative products, regardless of the reader's level of sophistication. The recent highly publicized derivatives problems are objectively reviewed by the authors who contribute important and sensible recommendations to avoid similar situations in the future."—Dipak K. Rastogi, Executive Vice President and former Head of Global Derivatives, Citibank, N. A.

"Derivatives can play a critical role in achieving corporate financing and investment strategies. Whether you are a novice or a seasoned practitioner, Crawford and Sen present a superb roadmap with well-chosen, real-world illustrations. Their vivid insights make this book a 'must-read' for corporate and pension fund managers."—Sandra S. Wijnberg, Vice President & Assistant Treasurer, PepsiCo, Inc.

"Crawford and Sen have done a fine job of making derivatives comprehensible for managers who need to understand the basic features and uses of these instruments. This coverage, together with the book's unique emphasis on senior management's fiduciary obligations to the firm's shareholders, sets this book apart from other attempts to make derivatives accessible to senior management. This book is an important read."—John F. Marshall, Executive Director, International Association of Financial Engineers and Professor of Financial Engineering, Polytechnic University

Derivatives are the power tools that enable users to analyze components of risk and return inherent in an investment or a business. The popularity of derivative use in the marketplace has surged in recent years, spurring financial innovation and better risk management. Yet this popular instrument is double-edged: derivatives are as risky as they are beneficial. In light of recent, highly publicized disasters—the Orange County bankruptcy and the Barings fiasco—it is imperative that business and finance professionals have a current and basic knowledge of this complicated and venturesome field.

If you are a shareholder, director, or other decision maker in a company utilizing derivatives, it is important that you know how to maximize the benefits of derivatives and minimize the damage that they can cause. Now, two leading financial experts provide the solid principles you need to understand and properly use derivative products and structured financing. Starting upwards from the ground floor, this straightforward, no-nonsense resource is replete with tables, graphs, and common examples and common sense, offering invaluable information on:

  • The three major types of derivatives-options, futures, and swaps
  • Leverage—what it is, why it is so important, how it is used to increase returns, and how it multiplies risk
  • Hedging a stock portfolio and hedging industry risk with synthetic futures
  • Business risks—core and secondary risks; which business risks to hedge with derivatives
  • Investment strategies using derivatives
  • Derivative risks—market, credit, legal, and systemic
  • Fiduciary duties—the duties of loyalty and care, exceptions, the prudent investor rule, business judgment, rule and disclosure requirements
  • Delegating management functions—selecting, instructing, and monitoring experts

Whether you're a manager, director, attorney, accountant, corporate executive, or corporate shareholder, this comprehensive book will prove to be an invaluable guide on utilizing and handling derivatives wisely, resourcefully, and successfully.

 

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Contents

Introduction
1
Options and Futures
7
Swaps and Structured Notes
23
Mortgage Derivatives
39
Leverage
49
DERIVATIVES IN ACTION
57
Hedging a Stock Portfolio
69
Business Risk Management
93
Derivative Disasters
135
Derivative Regulation
147
Controlling Risk
153
FIDUCIARY RESPONSIBILITIES
165
Standard of Care in Delegation
177
Legal Liability in Using Derivatives
185
Looking Forward
195
Glossary
205

Investing Through Derivatives
109
UNDERSTANDING AND MANAGING RISK
121

Common terms and phrases

About the author (1996)

BIDYUT SEN is a Managing Director of Morgan Stanley & Co., Inc. where he is the global head of Structured Asset Management and a former co-head of the Worldwide Derivative Products Group. He has been a leading figure in derivative products and structured financing for more than a decade and is responsible for a number of innovations in that area.

GEORGE CRAWFORD is a lecturer at the Stanford Law School where he teaches derivatives and fiduciary investing to students and corporate directors at the Directors' College. His practical experience as an investor, and formerly as General Counsel of a public company, a White House staff member, and a Partner and the Firm Chairman of the Private Capital Section at Jones, Day, Reavis & Pogue, complement his academic perspective as a Stanford teacher, Hoover Institution Research Fellow, Fiduciary Foundation Director, and former Harvard Law Review President and Law Clerk to U.S. Supreme Court Justice Byron White.

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