Good Derivatives: A Story of Financial and Environmental Innovation

Foreword

There are some books that change our way of looking at a subject. Dr. Richard Sandor's book is one of them.

Our modern life, with all its comfort, convenience, and freedom unimaginable to early generations, depends critically on the smooth, joint working of an intricate web of interconnecting markets, from fairs and supermarkets to commodity exchanges and financial futures. In most cases, these markets appear to work so effortlessly that many of us take their existence and operation for granted. But they are human creations.

In this book, Dr. Richard Sandor presents a personal account of how new derivative markets have come to be invented over the past few decades, a time of explosive growth of financial instruments, most of which we still poorly understand today. It is an engaging and informative tale of how markets are created.

Although economists claim to study the working of the market, in modern economics, exchange takes place without any specification of its institutional setting. When economists say that the market works, what usually comes to their mind is a diagram in which the demand schedule intersects the supply schedule, giving rise to the equilibrium point at which the price and quantity are mutually determined. The demand and supply schedules, which Alfred Marshall referred to as the two blades of the price scissors, are theoretical constructions. While we cannot conduct economic reasoning without certain basic concepts and some relevant theories, economic ...