Correct me if I am wrong but "derivative instruments" means puts, calls, and futures, by themselves, or in combination, like swaps, butterflies, straddles, collars, and so forth.
The danger isn't so much the instrument, it's the ability to buy on margin, which is called leverage, but I don't see how it varies from plain vanilla margin. If financial institutions potentially owe more than they've got or can borrow, that's dangerous, I agree, and I think it's probably illegal. If an individual does it, it's also dangerous, and I thought it was illegal, too.
Apparently hedge funds get away with it because there is no requirement for transparancy. I know for a fact the BIS is trying to force transparency on hedge funds, and the Fed is, too.
Caveat: I don't really know much about trading options and futures, just that you can lose a lot of money and not even have worthless shares of stock to paper your wall with. |
