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Through the eyes of an inventor of new markets, Good Derivatives: A Story of Financial and Environmental Innovation tells the story of how financial innovation—a concept that is misunderstood and under attack—has been a positive force in the last four decades. If properly designed and regulated, "good derivatives" can open vast possibilities to address a variety of global problems. Filled with provocative ideas, fascinating stories, and valuable lessons, this timely book will provide both an insightful ...
Through the eyes of an inventor of new markets, Good Derivatives: A Story of Financial and Environmental Innovation tells the story of how financial innovation—a concept that is misunderstood and under attack—has been a positive force in the last four decades. If properly designed and regulated, "good derivatives" can open vast possibilities to address a variety of global problems. Filled with provocative ideas, fascinating stories, and valuable lessons, this timely book will provide both an insightful interpretation of the last forty years in capital and environmental markets and a vision of world finance for the next forty years.
As a young economist at the Chicago Board of Trade, Richard Sandor helped create interest rate futures, a development that revolutionized worldwide finance. Later, he pioneered the use of emissions trading to reduce acid rain, one of the most successful environmental programs ever. Throughout these pages, he will provide unique insights into the process of creating these new financial products. Covering successes and failures, the story describes the tireless process of inventing, educating, and creating support for these new inventions in places like Chicago, New York, London, and Paris and how it is unfolding today in Mumbai, Shanghai, and Beijing.
Along the way, this book tells the story of the creation of the Chicago Climate Exchange and its affiliated exchanges—the European Climate Exchange, the Chicago Climate Futures Exchange, and the Tianjin Climate Exchange, located in China. The lessons learned in these markets can play a critical role in effectively addressing global climate change and other pressing environmental issues. The author argues that market-based trading systems are a far more effective means of reducing pollutants than "command-and-control." Environmental markets may ultimately help to find solutions to issues such as rainforest destruction, water problems, and biodiversity threats.
Written in an engaging, narrative style, Good Derivatives will be of interest to both practitioners and general readers who want to better understand the creative process of financial innovation. In the middle of so much distrust of markets, it is also a recipe of how transparent, well-regulated markets can be a force for good in environmental, health, and social areas.
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 Commodity Futures Contract 65
Chapter 5 The Chicago Board of Trade Years: Financial Futures Contract 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
Posted April 2, 2012
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.
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Posted May 9, 2012
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.Was this review helpful? Yes NoThank you for your feedback. Report this reviewThank you, this review has been flagged.
Posted May 1, 2012
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.