Derivatives Risk Management

Abstract

Imagine an investment product designed for individual, middle-class and working-class investors, whereby the investor acquires a risky asset worth more than twice the investor’s annual revenues for a small initial outlay. The investor then undertakes to make regular payments of up to a third of his or her annual income over a defined, albeit extended, period. The only collateral demanded is the value of the risky asset itself. If the investor sells the asset before the end of the contract term he or she receives or pays the difference between the initial bought price and the initial sale price of the risky asset, which can be many times greater than the amount of the initial outlay.