Every week, another alarm about European sovereign and banking risk. Is the euro tottering? Could European states default? Derivatives are central to managing credit, interest rate and currency risks – but in this unsettling new environment, those risks are changing. Elise Coroneos asks whether the derivatives market is fit for the task.
Mounting debt, a common currency entering new waters of instability, disparate fiscal polices across the euro zone, countries on the verge of default and fears that others could follow – the architecture of European finance is being shaken as it has not been for decades.
Derivatives were invented to cope with these kinds of risks – but they can only do their job if firms are still willing to use them. And as the risks change, market participants may find they need to use instruments in different ways, or even invent new contracts.
On the horizon is another...