What’s a good derivative anyway? Richard Sandor, a former Maxon lecturer at GWSB who is known as the “father of carbon trading,” returned to the School Dec. 3 to talk about his new book on derivatives.
Sandor is chairman and CEO of Environmental Financial Products (EFP), which specializes in inventing, designing, and developing new financial markets with a special emphasis on investment advisory services.
EFP’s services focus on monetizing emission reductions, energy efficiency improvements, and carbon sequestration; as well as managing exposure to diverse financial risks. EFP was the incubator to the Chicago Climate Exchange (CCX), North America’s largest greenhouse gas emission reduction program.
Sandor, who delivered the 2008 Maxon Lecture and was named one of Time magazine’s “Heroes of the Environment” for his work on carbon trading, is the author of Good Derivatives: A Story of Financial and Environmental Innovation.
A derivative is a contract between two or more parties. Its value is determined by fluctuations in its underlying assets, such as stocks, bonds, commodities or currencies. Derivatives are used as instruments to hedge risk, but can also be used for speculative purposes.
Sandor said finance in general has gotten a bad reputation, but that derivatives play an important role in hedging risk so that the nation’s food supply, for instance, is secure. Farmers, for example, can make decisions on what to plant in the coming spring based on what prices will be.
Good derivatives, he explained, are regulated and transparent. They perform two functions: transferring risk and discovering prices.
“Derivatives have an important value,” he said. “They are problem-free when they are transparent and regulated. They can be abused.” However, he said, so can a hammer, which can be used to injure someone or help build a house.”
Sandor’s message for GWSB students?
“Go build houses,” he said.
For more on Sandor’s book, go here.
Posted by gwsb on December 4, 2012 | Filed under: GWSB News.