Tuesday, June 25, 2013

Risk Management and Contractual Obligations

[Author: William Rapp, New Jersey Institute of Technology]

Many financial analysts, policymakers and regulators have forcefully argued that over $700 trillion in derivatives and other contractual risk management tools are a clear and unambiguous good for financial markets and economic growth because they transfer risk from organizations and individuals wanting stability and less volatility managing principal and cash flows. This wisdom argues risk is shifted to those better able to handle these effects while also dispersing it across a wide range of participants. The recent global financial crisis brings these claims and assumptions into doubt. Indeed these financial instruments may add to the amount risk that must be managed and regulated rather than just transferring it to stronger hands. This paper explains how this occurs and why laws and regulations requiring more capital and the use of exchanges may not be enough to limit contractual exposures and related systemic risk.

Click here to download the complete paper.

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