Good Derivatives: A Story of Financial and Environmental Innovation


Through the eyes of an inventor of new markets, GoodDerivatives: A Story of Financial and EnvironmentalInnovation tells the story of how financialinnovation—a concept that is misunderstood and underattack—has been a positive force in the last four decades. Ifproperly designed and regulated, "good derivatives" can open vastpossibilities to address a variety of global problems. Filled withprovocative ideas, fascinating stories, and valuable lessons, thistimely book will provide both an insightful interpretation of ...

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Good Derivatives: A Story of Financial and Environmental Innovation

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Through the eyes of an inventor of new markets, GoodDerivatives: A Story of Financial and EnvironmentalInnovation tells the story of how financialinnovation—a concept that is misunderstood and underattack—has been a positive force in the last four decades. Ifproperly designed and regulated, "good derivatives" can open vastpossibilities to address a variety of global problems. Filled withprovocative ideas, fascinating stories, and valuable lessons, thistimely book will provide both an insightful interpretation of thelast forty years in capital and environmental markets and a visionof world finance for the next forty years.

As a young economist at the Chicago Board of Trade, RichardSandor helped create interest rate futures, a development thatrevolutionized worldwide finance. Later, he pioneered the use ofemissions trading to reduce acid rain, one of the most successfulenvironmental programs ever. Throughout these pages, he willprovide unique insights into the process of creating these newfinancial products. Covering successes and failures, the storydescribes the tireless process of inventing, educating, andcreating support for these new inventions in places like Chicago,New York, London, and Paris and how it is unfolding today inMumbai, Shanghai, and Beijing.

Along the way, this book tells the story of the creation of theChicago Climate Exchange and its affiliated exchanges—theEuropean Climate Exchange, the Chicago Climate Futures Exchange,and the Tianjin Climate Exchange, located in China. The lessonslearned in these markets can play a critical role in effectivelyaddressing global climate change and other pressing environmentalissues. The author argues that market-based trading systems are afar more effective means of reducing pollutants than"command-and-control." Environmental markets may ultimately help tofind solutions to issues such as rainforest destruction, waterproblems, and biodiversity threats.

Written in an engaging, narrative style, GoodDerivatives will be of interest to both practitioners andgeneral readers who want to better understand the creative processof financial innovation. In the middle of so much distrust ofmarkets, it is also a recipe of how transparent, well-regulatedmarkets can be a force for good in environmental, health, andsocial areas.

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Product Details

  • ISBN-13: 9780470949733
  • Publisher: Wiley
  • Publication date: 4/3/2012
  • Edition number: 1
  • Pages: 640
  • Sales rank: 1,058,276
  • Product dimensions: 6.40 (w) x 9.10 (h) x 1.50 (d)

Meet the Author

Richard L. Sandor is Chairman and Chief Executive Officer of Environmental Financial Products LLC, which specializes in inventing, designing, and developing new financial markets with a special emphasis on investment advisory services. EFP was established in 1998 and was the predecessor company and incubator to the Chicago Climate Exchange (CCX), the European Climate Exchange (ECX), and the Chicago Climate Futures Exchange (CCFE). Dr. Sandor was honored by the City of Chicago for his contribution to the creation of financial futures and his universal recognition as the "father of financial futures." In October 2007, he was honored as one of Time magazine's "Heroes of the Environment" for his work as the "Father of Carbon Trading." Dr. Sandor is a Distinguished Professor of Environmental Finance at Guanghua School of Management at Peking University and a Lecturer in Law at The University of Chicago Law School.

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Table of Contents

Foreword ix

Preface xiii

Acknowledgments xxi

Chapter 1 The Early Years 1

Chapter 2 Trying to Change the World 23

Chapter 3 The Berkeley Years 47

Chapter 4 The Chicago Board of Trade Years: The CommodityFutures Contract 65

Chapter 5 The Chicago Board of Trade Years: Financial FuturesContract 89

Chapter 6 Educating Users and Building the Market 125

Chapter 7 Treasury Bond and Note Futures 139

Chapter 8 The Decade of the Eighties 167

Chapter 9 Globalizing Chicago Exchanges 191

Chapter 10 Environmental Finance 205

Chapter 11 Blame It on Rio 223

Chapter 12 The Beginning of the Entrepreneurial Years 239

Chapter 13 You’re Gonna Trade What? 265

Chapter 14 From the Pit to the Box 291

Chapter 15 Conceiving a New Kind of Exchange 313

Chapter 16 The Twenty-First Century Lighthouse 327

Chapter 17 CCX Market Architecture 351

Chapter 18 Chicago Climate Exchange 375

Chapter 19 The Rise of the Chicago Climate Exchange 393

Chapter 20 The Fall of the Chicago Climate Exchange 413

Chapter 21 The Chicago Climate Futures Exchange 429

Chapter 22 The European Climate Exchange 453

Chapter 23 India 479

Chapter 24 Opening New Markets in China 501

Chapter 25 Good Derivatives 533

Appendixes 559

Acronyms 575

Glossary 577

Index 593

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Sort by: Showing all of 3 Customer Reviews
  • Anonymous

    Posted April 2, 2012

    Refreshing Book with Intellectual Heft

    If you are expecting a textbook narrative littered with financial terminologies, then you will be sorely disappointed. Richard Sandor is a great story teller-some of his stories are nothing short of hilarious. Not only so, he is a great teacher (although, one would argue that these two traits go hand in hand.) He elucidates arcane financial concepts with his characteristic wit and humor. From baseball to interest rate futures, hedging hurricanes to contemporary art, Good Derivatives manages to teach us something while being a refreshing and fun read. The world is built upon an intricate network of markets that is often invisible to us. Most people find it hard to conceive of markets based off of air and water, much less the tangible benefits these "invisible" markets bring to society. Good Derivatives illustrates to us, in an easy-to-understand way, the quantifiable benefits of these markets and why the world needs good derivatives. As a prominent entrepreneur and innovator, Richard Sandor is able to provide unique insights into the financial world. He will also light the bulb for those with an innovative streak and open up a plethora of exciting opportunities. The realm of derivatives is virtually boundless. As long as there is inefficiency in the world, there is a potential financial instrument that can be created to correct this. I was most surprised, for example, by the suggestion of saving endangered animals using financial contracts! However, Richard Sandor does not deceive us into believing that doing so will be easy. Instead of sugar-coating the process of financial innovation, he delivers the reality of a market creating process with unblinking honesty. Take, for example, the multi-page table on the speeches he gave in the 1990s. Far from being a meaningless page-filler, as some may assume, I believe it is there to demonstrate the sheer scale of the educational efforts involved in creating a new market. It involves years of painstaking work and battling against traditional norms. Richard Sandor is anything but an ivory-tower economist who dwells in the elegance of theory. He is a fearless, hands-on practitioner who is unafraid to test anything in the real world. This insight makes Good Derivatives an especially useful read for policy makers and legislators alike. Personally, it was probably also the most valuable contribution of Sandor’s book.

    1 out of 1 people found this review helpful.

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  • Anonymous

    Posted May 9, 2012

    highly recommend

    A valuable understanding of how derivatives markets have evolved, the challenges, opportunities and substantial economic benefits when derivatives are properly designed, structured, regulated and traded...told in a lively and personal format from the perspective of someone who has been "present at the creation". Fascinating story line and thoughtful insights about the future of derivatives.

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  • Posted May 1, 2012

    Highly Recommended

    Richard Sandor's book is a fascinating journey into the competitive world of financial and environmental markets. I am not an economist or environmentalist, (and until I read this book would not have known a derivative if I saw one) but I was intrigued with the story of how Sandor was able to build interest rate futures and climate exchange markets from scratch, often fighting uphill battles against skeptical politicians, economists and others. When you read this book, you learn what it takes to be an innovator, which Sandor surely is. The story telling is masterful, beginning with the early days in Brooklyn in the 1950s and Berkeley in the 1960s. It was at Berkeley where Sandor, an economics professor, conceived of his revolutionary ideas. This launched a career that took him to Chicago where he eventually became known as the "Father of Financial Futures." From there, he traveled the world, introducing people to his new ideas and changing the course of financial history. Not one to rest on his laurels, he then took on the problem of global warming, introducing the idea of a climate exchange to reduce man-made pollutants. There are fascinating stories throughout this book about Sandor's experiences in exotic places, including China, India, and many other countries.

    One doesn't have to be an economist or financial analyst to truly enjoy this book. When I was finished reading it, I felt that I had not only learned a lot about how markets work, but also what it takes to be a visionary and fight hard for what one believes in. This is truly a remarkable book that I highly recommend.

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