1. General Introduction Flashcards
1
Q
What mainly brought about the collapse of Lehman Brothers?
A
Trading in Derivatives
2
Q
What are Derivatives chiefly designed to be used for?
A
To reduce risk faced by organisations and individuals, by hedging.
3
Q
Why are derivatives called “Derivatives”?
A
Because they derive their price from another instrument (the underlying).
4
Q
What is another important aspect of derivatives, which contributes to be them being high-risk instruments?
A
They nearly always have built in leverage/gearing.
5
Q
What are the three common threads to when problems arise from derivatives?
A
- Excessive leverage
- Counterparty Risk
- Complexity & Lack of transparency
