Speculation 101

By on 09/25/2010 in Uncategorized

One of the reasons I thought Michael Moore’s Capitalism, A Love Story was a career highlight is because of clips like this, in which our hapless hero tries to find out what a derivative actually is.

Says a former Lehman Brothers vice-president: “it’s a secondary bet on an underlying product, so you might have a stock, and you have an option on that stock, and the option allows you the privilege, but not the obligation, to buy or sell.” Sadly, it’s a correct definition, but it’s hardly an illuminating one.

Luckily, Olivier de Schutter, the UN Special Rapporteur on the Right to Food has come out with a discussion of financial speculation in food markets which includes a handy financial jargon decoder. Here, for instance, is his take on derivatives, which he explains as

“a financial instrument whose value depends on (or derives from) the values of other, more basic underlying variables”: it is therefore a financial instrument “which has a value determined by the price of something else”. This “something else” can be almost anything: it can be assets or commodities such as oil or wheat, or financial instruments such as securities or indices.”

Ok, so derivatives are inherently a little complicated. But it’s a good start to try to explain why they’re called what they’re called. And the rest of the report does a fine job in explaining why it is that the swings in food price markets are far from benign. Read it all here.