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GOVERNING GLOBAL DERIVATIVES

Explore the evolution of derivatives from ancient times to modern financial centers like Chicago and London. Learn about measurement, accounting, monetary analysis, fiscal policy, and the theory of investment in the global derivatives market. Examine the impact of derivatives on public finance, sovereign debt, and the role of central banks. Delve into the regulatory challenges post-2007 crisis and the future direction for derivatives governance.

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GOVERNING GLOBAL DERIVATIVES

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  1. GOVERNING GLOBAL DERIVATIVES C. OLDANI

  2. OUTLINE • Introduction • Measurement and accounting • Monetary Analysis and Policy • Fiscal Policy • Theory of Investment

  3. Introduction • Derivatives are as old as finance; the first option is reported in the Holy Bible. • Today Chicago and London are the financial centers of derivatives trading. • World derivatives activity reached 10 times GDP. • Derivatives recipe for success: taylored on customers’ needs, are deregulated, highly liquid and flexible.

  4. Measurement and Accounting • IAS n39 fair value: applied to derivatives in the balance sheet of firms, banks.Not for Govern’ts or public bodies (e.g. Regions or Cities). • Measured at notional amount (not turnover). • The fair value means that they can be assets - liabilities depending on the market value of contract (in-at or out of the money). • Tax timing options.

  5. Measurement and Accounting • Derivatives: must know the risk! • Hedge funds: deregulated financial operators with extreme freedom and small transparency. • From the traffic light to the roundabout.

  6. Monetary Analysis and Policy • Financial globalization and the spread of derivatives influence the money demand, and stability. • The toolbox of central banks should be updated. • Expectations management exercise

  7. Monetary analysis and policy • Monetary aggregates • Interest rate channel • Money for speculative purpose • Money for precautionary motive of firms and banks

  8. Monetary analysis and policyTaylor rule with impl.vol of options on interest rates

  9. Fiscal policy • For taxpayers: tax timing options • Public finance and moral hazard • Fiscal policy: incentive management

  10. Fiscal policy • Sovereign debt and derivatives • Crashes of states with derivatives: the O.C., Taranto. • GASB project to put derivatives in the balance sheet

  11. Italy and Derivatives After the modification of Constitution (devolution) public bodies are allowed to finance themselves the way they like. Growing public debt, local and central. Which is the rating of an Italian city? Freedom or anarchy?

  12. Theory of Investment • The interest rate is the price of money, the cost of public debt, and the cost of external financing for investment. • The analysis of the interest is fundamental for investments and capital. • Macroeconomic derivatives: hedging on future growth.

  13. Theory of investment • Tobin’s Q: derivatives can be useful to compute the market value of assets. • Minsky FIH can be implemented with derivatives, providing encouraging results. • Energy and derivatives

  14. Conclusion • After 2007 crisis, the role of derivatives and their deregulation has to be revisited. • Has the G20 the power-willingness to do that? • Money speaks at Washington.

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