GOVERNING GLOBAL DERIVATIVES C. OLDANI

OUTLINE Introduction Measurement and accounting Monetary Analysis and Policy Fiscal Policy Theory of Investment

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.

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.

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.

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

Monetary analysis and policy Monetary aggregates Interest rate channel Money for speculative purpose Money for precautionary motive of firms and banks

Monetary analysis and policy Taylor rule with impl Monetary analysis and policy Taylor rule with impl.vol of options on interest rates

Fiscal policy For taxpayers: tax timing options Public finance and moral hazard Fiscal policy: incentive management

Fiscal policy Sovereign debt and derivatives Crashes of states with derivatives: the O.C., Taranto. GASB project to put derivatives in the balance sheet

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?

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.

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

Conclusion After 2007 crisis, the role of derivatives and their deregulation has to be revisited. Has the G20 the power-willingness to do that? Money speaks at Washington.