The Tricky World of Derivatives

With the Government calling for stricter regulation by the SEC on Wall Street, I am saying its pointless. The SEC will always be one step behind Wall Street for the simple fact is the bright Financial minds will always chose Wall Street over the SEC and Government for the money. Wall Street breeds innovation, if you were to shut down all current operations (Derivatives, Hedging, etc) they would only develop another way to make as they call it 'Easy Money'. Just look we are only 10 years from the founding of Long Term Capital look where that brought us. Those who thought that the SEC needed to regulate the hedging of Derivatives must realize that Derivatives aren't to blame. Derivatives are financial contracts, or financial instruments, whose values are derived from the value of something else usually an underlying asset such as commodities, equities, residential mortgages, commercial real estate, loans, bonds, an index, consumer price index. Almost anything can be used to underline the value of a derivative. The main types of derivatives you would see are forwards, futures, options, and swaps. Derivatives can be used to mitigate the risk of economic loss arising from changes in the value of the underlying. This activity is known as hedging. Alternatively, derivatives can be used by investors to increase the profit arising if the value of the underlying moves in the direction they expect. This activity is known as speculation. Most see this as something only Wall Street understands meaning that only Wall Street profits. One this is untrue, it is not a complicated process. I learned Derivatives in less than 3 months by reading. Anyways derivatives help free up capital, provide liquidity, and allowed markets to trade freely, something which benefits fall in line to everyone. The problem with derivatives last summer was no one understood the pricing of Wall Street. To add to the problem these transactions were taking place when underlying markets were unstable. If markets were not so shaky then the derivatives would have just matured or not been bought. Supply outgrew demand and since Derivatives were speculative they were the first markets to fail and first to blame.