Derivatives, in the past, have served a simple purpose: to divide up the risk of some commodity’s “price” that businesses rely on, and to pass that risk onto others who are more able to manage that risk.

Equities or shares of a company are a type of derivative by their very nature. Equities derive their value from the underlying company’s assets and its expected profits.

Bonds or loans are derivatives of a contract with their value derived from the PAR value at maturity, the likelihood of repayment and the duration when that repayment is due, among other things.

Could we not come up with derivatives outside of of the Equity, Bond or Commodity markets? Once started, it’s difficult to stop:

• Baseball player’s salaries
• Traffic at 6:30pm on a Friday on the I-95 highway within Detroit’s boundaries
• Goals per game by the Toronto Maple Leafs
• Number of babies born each month in New York
• Temperature at Mid-Day on a specific date
• Life expectancy of certain celebrities
• The costs associated with a tornado destroying your home

The distinction of whether this is “gambling” or “hedging” seems to lie in whether there is a business need to quantify a given risk. Insurance is a derivative only by another name. Insurance fills an emotional need of the person avoiding risk. Derivative is a speculative investment prone to destroying our financial markets and sending us head-long into a recession.

Derivatives need a better PR manager.