Financial derivatives, global economic crisis and less developed countries (LDCs)

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Financial derivatives have been acclaimed as the greatest innovation of the 20th century. This popularity is not unconnected to their use as risk management tool. It is therefore disconcerting that such instruments meant to manage risks can be blamed for having exacerbated it, to the extent of causing a global crisis. In the light of the aforementioned, this paper examines the nature and uses of derivatives, assesses the role it played in the global financial crisis, investigates if the presence of derivatives in the financial market was sufficient condition to cause the crisis and examines the impact of the crisis on less developed countries (LDCs). Findings reveal that the crisis had serious debilitating effect on LDCs and that though derivatives triggered the crisis, certain fundamental and systemic defects of capitalism actually predisposed the world economy to it. Tying executive bonuses to long run performance, separating investment and commercial banking and insisting that derivatives be traded only in recognized exchanges were recommended to forestall reoccurrence of this type of crisis. Key words: Derivatives, regulations, economic crisis, mortgage default, futures, swap, hedging.