ABSTRACT
Top company managers would lie awake at night worrying about opening new factories, launching new products or fighting off attacks from competitors. But a new terror has crept into boardrooms and executive suites around the corporate world: the prospect of losing a fortune through derivatives—financial instruments such as swaps, futures and options—which few people understand but demand for which has nonetheless soared. Most important of all, top managers often fail to understand properly the firm's sensitivities to different sorts of risk. Of the risks associated with derivatives themselves, the one that gets the most headlines is systemic risk: the possibility that losses on a derivative contract might cause a bank to go bust, producing knock-on effects throughout the global financial system. Once a firm has identified its strategic risks, and decided that it should hedge some of them, it may face some tricky problems.
