Derivatives let investors tailor risk exposure precisely and have become tradable commodities themselves

Evidence

But the derivative has a felicitous second meaning. Within financial parlance, a derivative is a secondary investment vehicle, an asset whose value depends on or refers to that of another. Derivatives are typically contracts between two financial actors that give one or the other the option or obligation to buy or sell another asset at a specified future time. These include “futures” contracts (agreements to purchase a certain quantity of a certain asset at a future date), “options” (like futures, but one party may opt out of the deal when the date arrives) and “swaps” (including the infamous “credit default” variety, which gives a party the option of exchanging one asset for another – often currency – if certain conditions are met). Derivatives also enable buyers to purchase only certain dimensions of an underlying security, as when banks securitized sub-prime mortgages, then sold different “tranches” of those mortgage packages to different investors interested in different levels of risk exposure. Effectively, derivatives allow investors an extremely precise tool for tailoring exposure to risk, allowing a much more meticulous and sophisticated construction of interdependent portfolios (LiPuma and Lee 2004, 33–34; Martin 2007, 31–32). Further, derivatives contracts have become tradable commodities in and of themselves, allowing financial actors to develop a speculative trade in derivatives – that is, to create further derivative products out of multiple derivative contracts. Since the 1970s, the volume of derivative contracts and exchanges has skyrocketed, such that, by 2006, the notional value of over-the-counter derivatives was worth over 600% of the global GDP (Foster and Magdoff 2009, 28). This fictitious capital tremendously influences economies and markets large and small, as it rushes in and out of national currencies and government bonds, and global agricultural and energy products, not to mention mortgages, real estate and corporate shares. — Max Haiven, Cultures of Financialization, 478

Categorization

• DEFINE: Clear operational definition of futures, options, swaps, and tranches — useful reference for the financialization argument.
• XREF: The 600% of global GDP figure and the risk-tailoring logic connect directly to deWaard’s cultural argument about finance colonizing everyday life. — connects to: Derivatives inverted from insurance into engines that increase volatility exposure. — Aris Komporozos-Athanasiou, Speculative Communities: Living with…, 91; Derivatives evolved from risk-hedging tools into a dominant speculative asset class — Max Haiven, Cultures of Financialization, 135; Derivatives are speculative techniques betting on future asset-price movements — Max Haiven, Cultures of Financialization, 153 (+3 more)
• SEED: Possible angle: ‘derivatives of the self’ — how individuals now tailor personal risk exposure (insurance, side hustles, financialized identity) the way derivatives tailor capital risk.

Broader Connections

• Derivatives let investors trade an asset’s attributes without the asset itself #expands (0.85) — Andrew deWaard, Derivative Media, 486