Download GOVERNING GLOBAL DERIVATIVES

GOVERNING GLOBAL
DERIVATIVES
C. OLDANI
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OUTLINE
1.
2.
3.
4.
5.
Introduction
Measurement and accounting
Monetary Analysis and Policy
Fiscal Policy
Theory of Investment
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Introduction
 Derivatives are as old as finance; the first option is
reported in the Holy Bible.
 Today Chicago and London are the financial centers
of derivatives trading.
 World derivatives activity reached 10 times GDP.
 Derivatives recipe for success: taylored on
customers’ needs, are deregulated, highly liquid and
flexible.
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Measurement and Accounting
 IAS n39 fair value: applied to derivatives in the
balance sheet of firms, banks.Not for Govern’ts or
public bodies (e.g. Regions or Cities).
 Measured at notional amount (not turnover).
 The fair value means that they can be assets liabilities depending on the market value of contract
(in-at or out of the money).
 Tax timing options.
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Measurement and Accounting
Derivatives: must know the risk!
Hedge funds: deregulated financial operators
with extreme freedom and small transparency.
 From the traffic light to the roundabout.
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Monetary Analysis and Policy
Financial globalization and the spread of
derivatives influence the money demand, and
stability.
The toolbox of central banks should be
updated.
Expectations management exercise
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Monetary analysis and policy
1.
2.
3.
4.
Monetary aggregates
Interest rate channel
Money for speculative purpose
Money for precautionary motive of firms
and banks
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Monetary analysis and policy
Taylor rule with impl.vol of options on
interest rates
rt    Et  t1  xt1 t
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Fiscal policy
1. For taxpayers: tax timing options
2. Public finance and moral hazard
3. Fiscal policy: incentive management
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Fiscal policy
1. Sovereign debt and derivatives
2. Crashes of states with derivatives: the O.C.,
Taranto.
3. GASB project to put derivatives in the
balance sheet
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Italy and Derivatives
After the modification of Constitution
(devolution) public bodies are allowed to
finance themselves the way they like.
Growing public debt, local and central.
Which is the rating of an Italian city?
Freedom or anarchy?
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Region
YEAR 2000
Outstanding Debt Swap*
Table 3.6 Italian Regions’ derivatives activity
YEAR 2003
Up Front Outstanding Debt
Up Front
Swap*
YEAR 2006
Outstanding Debt Swap*
Piedmont
4932,581,423
0 0
331,715,222.50
152,632,379.45
223,291.00
Lombardy
691,912,587
0 0
458,371,923.21
97,278,045.99 1,195,416.43
Friuli Venezia Giulia
357,499,369.52
148,342,418.02
0
Veneto
1,007,090,953
0 0
286,171,192.51
49,012,653.48
445,047.33
Liguria
273,654,839 88,200,000 0
173,803,197.25
81,450,799.54
0
E.Romagna
860,609,136
0 0
349,023,525.95
66,348,069.61
800,000.00
North
3,325,848,937 88,200,000 0
1,956,584,430.94
595,064,566.09 2,663,754.76
Tuscany
930,174,881 393,294,659 0
742,289,308.12
229,292,745.33
153,000.00
Umbria
313,429,615
0 0
33,623,267.04
33,791,163.27
574,000.00
Marche
737,558,211
0 0
176,470,759.53
39,274,213.89
519,935.71
Lazio
1,508,000,000 800,000,000 0
177,307,230.68
176,836,220.70 1,971,496.56
Center
3,489,162,707 1,193,294,659 0
1,129,690,565.37
479,194,543.19 3,218,132.27
Abruzzo
262,922,542 129,114,000 0
280,636,879.38
134,163,691.18 2,226,427.74
Molise
110,465,132
0 0
40,044,999.73
12,290,025.80
250,000.00
Campania
1,202,473,772
0 0
136,754,837.98
33,902,521.29
450,000.00
Puglia
2,210,500,249
0 0
253,410,884.65
174,558,260.08 5,217,431.26
Basilicata
92,138,655
0 0
42,219,276.64
21,511,065.98
300,000.00
Calabria
614,900,000
0 0
154,272,361.40
128,317,634.48 2,786,077.63
South
4,493,400,350 129,114,000 0
907,339,240 881,168,763.33
11,229,936.63
TOTAL
11,308,411,995 1,410,608,659 0
3,993,614,236.1 1,579,002,308.28 17,111,823.66
* End of year value, net of swap amortizing and currency hedging.** Underlying operations are guaranteed at 70% by the state.
*** Swap refers to a mortgage paid by the state.
Source: Corte dei Conti, Relazione Generale sulle Regioni, 2001, 2004 and 2007.
Up Front
3,827,929,595 1,856,000,000 0
2,987,032,983 288,098,929** 0
1,744,899,458 328,325,500
726,887,577
97,136,888
1,134,541,946 438,988,364
10,421,291,558 3,008,549,681
1,525,339,645 551,156,742,
334,761,535 253,138,502
943,178,758
3,607,260,877 1,269,794,638
6,410,540,815 1,074,089,882
1,058,071,181 804,425,095
274,073,984 257,817,575
4,237,928,892 2,714,707,311
2,346,702,397 729,474,474
181,206,975 218,000,000***
626,391,327 614,046,040
8,724,375,256 5,338,470,495
25,556,207,629 10,421,110,058
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Theory of Investment
The interest rate is the price of money, the
cost of public debt, and the cost of external
financing for investment.
The analysis of the interest is fundamental
for investments and capital.
Macroeconomic derivatives: hedging on
future growth.
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Theory of investment
Tobin’s Q: derivatives can be useful to
compute the market value of assets.
Minsky FIH can be implemented with
derivatives, providing encouraging results.
Energy and derivatives
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Conclusion
1. After 2007 crisis, the role of derivatives and
their deregulation has to be revisited.
2. Has the G20 the power-willingness to do
that?
3. Money speaks at Washington.
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