Derivatives as the New Gold Standard

Article Presented: 

Financial Derivatives: The New Gold? by Dick Bryan and Micheal Rafferty

This article attempts to draw functional links between Gold under the Gold Standard, the U.S. dollar under Bretton Woods and Financial Derivatives as the next or current way in which we peg or anchor monetary value.  Due to our current globalising society and economy Bryan and Rafferty both believe that Financial Derivatives are now a more current, realistic and productive tool in which to anchor our economy.

There are several reasons behind their hypothesis listed within this article, one being that within the current system, a more “flexible, floating anchor that reconciles so-called ‘real’ and ‘monetary’ phenomena” is required instead of the stable and fixed nature of Gold.  “The effect of derivatives is not to move financial markets towards ‘fundamental value’, but to commensurate the value of all financial assets, including currencies.”  This increases freedom of the market, competition, productivity as well as labour flexibility.

Their argument is backed up by the notion of floating exchange rate in the 1970s leading to an urge to find a constant, ‘fundamental value’ as well as the theory of Asset Pricing and Exchange Rates which demonstrates the unproportioned representation between reality and the neo-classist theory of the time.

Derivatives would play to roles as an anchoring device, to blend and to bind.  Forms of derivatives such as Options and Futures, establish pricing relationships that tie the future to the present or one place to another.  Forms like Swaps, create pricing relationships that readily convert between different forms of assets.  Binding compensates for any absence of stability and Blending acts as an anchor for global finance.  Derivatives allow for “currency values to be measured, not just in relation to other currency values, but in relation to all other forms of financial assets.”

Forms of Derivatives:  There are two Basic Categories.

Forwards: Any contracts that is bought at a current, set price to be delivered in the future

            Includes: Futures Contracts, Over-the-Counter Forward Contracts

Options: Any contracts that allows (but does not need to include) that one or both parties obtain certain benefits under certain conditions.

           

            Includes: Interest-Rate Options, Commodity Options

Most derivatives are traditionally used to increase leverage, and manage potential risks.

-----------------------------------------------------------------------------------------

Bryan, D. & Rafferty, M.  "Financial Derivatives: The New Gold?" Competition and Change. W.S. Maney & Son Ltd. 10.3, pg. 265-282 (2006).  Web.

Levinson, M.  Guide to Financial Markets.  Profile Books Ltd, The Economist Group Ltd (2014).  Print.