18Derivatives: The Good, the Bad, and the Ugly


I will talk about derivatives because there actually can be a place in some people’s—and some institutions’—portfolios for certain kinds of derivatives, especially if they are almost paranoically concerned about the possibility of losses. But as most of the public is at least vaguely aware, some uses and forms of derivatives can also be quite dangerous. In this chapter, I will explain the beneficial uses as well as the bad uses.

In the last thirty years, a segment of the financial market that was once very small has come to account for a large portion of the trades. Derivative products called ...

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