We must avoid the temptation to demonize derivatives, which are a vital tool in modern financial markets.

They are so useful in managing risk that if they didn' t exist, we would surely have to invent them.\n\n>-- Arthur Levitt, SEC Chairman The key to understanding derivatives is a deeper understanding of all that's und erlying. \n\n>-- Morgan Stanley Dean Witter You can think of a derivative as a mixture of its constituent underliers much as a cake is a mixture of eggs, flour, and milk in carefully specified proportions . The derivative's model provides a recipe for the mixture, one whose ingredient s' quantities vary with time.\n\n>--Emanuel Derman, "Risk" Derivatives don't kill people, people kill people.\n\n>--Clifford W. Smith, Jr., Professor, University of Rochester "Derivatives" That's the 11-letter four-letter word.\n\n>--Richard Syron, Chairm an, American Stock Exchange They're here, they're weird, and they're not going away. Yes, these beasties bit e, but companies that tame them have a competitive edge.\n\n>--Terente P. Par, Fo rtune Derivatives are like NFL quarterbacks. They get too much of the credit and too m uch of the blame. \n\n>--Gerald Corrigan, Goldman Sachs The world seems to be divided into two camps: those who embrace financial deriva tives as the Holy Grail of the new investment area, and those who denigrate deri vatives as the financial Antichrist. \n\n>--David Edington, quoted in Risk The beauty of derivatives is that they self-destruct every month and you get ano ther commission.\n\n>--Don Stone, NYSE specialist Options traders can get by with less math than you think. Tour de France cyclis ts don't need to know how to solve Newton's laws in order to bank around a curve .\n\n>--Emanuel Derman, The Journal of Derivatives There is no evidence that gullible widows and orphans are playing the derivative s market unless they are very rich widows and orphans who should know what they are doing.\n\n>--John P. LaWare, Board of Governors of the Federal Reserve Syste m Never make forecasts, especially about the future. \n\n>--Sam Goldwyn, Money Tal ks There are no fundamentally new or different risks in derivative products, rather ... familiar kinds of risks are presented and combined in novel ways. \n\n>--Br ian Quinn, director Bank of England Options carry a particularly high degree of risk. Investing in this area without a good understanding of how options work is like running through a dynamite fac tory with a burning match - you may live but you're still an idiot. \n\n>--Joel Greenblatt, Money Talks Hedging is the tai chi of trading. \n\n>--Jim Kharouf, Futures The only perfect hedge is in a Japanese garden. \n\n>--Gene Rotberg, Fortune Derivatives are innovations in risk sharing, not in risk itself. \n\n>--Philippe Jorion, Big Bets Gone Bad A leading money center bank, well-known for its derivatives sophistication, noto riously used to employ a "risk manager" whose main tools were a spreadsheet and a baseball bat. \n\n>--Richard Metcalfe, "Man or Superman Risk management is akin to a dialysis machine. If it doesn't work, you might ha ve a noble obituary, but you're dead.\n\n>--Ben Golub, Head of derivatives risk management, BlackRock Financial The early inventors of the first derivatives, working late at night next to thos e particle-physics laboratories, apparently had few friends when they went to co cktail parties. \n\n>--Robert Alderson, Goldman Sachs Guessing went out of fashion about ten years ago - ever since the derivative pro ducts markets began to flourish. \n\n>--Kalotay and Williams, "How to Succeed in Derivatives without Really Buying" The best advice may be this: treat exotic derivatives like powerful medicines, l arge doses of which can be harmful. Use them in moderation, for a particular pur pose (such as risk management) and only after having read the instructions on th e bottle. \n\n>--Philippe Jorion, "Big Bets Gone Bad" An exotic option is like pornographic literature. First of all, I may not be abl

e to define it, but I know it when I see it. Second, the definition depends on c ommunity standards, which depend on time and place. For example, the unexpurgate d version of D. H. Lawrence's Lady Chatterly's Lover was available in Florence i n 1928 but only reached London in 1960.\n\n>--William Margrabe, "Derivatives Str ategy" That fancy equity index double-knockout structure with added pelvic thrust that you're so proud of? Ancient history to the guys in foreign exchange options.\n\n >--Andrew Webb, "Derivatives Strategy" Archaeologists and pathologists have nothing on market analysts: All these prof essions are filled with people skilled at forming conclusions too late for anyth ing useful to come therefrom. Still, societies tolerate these sorts in the vain hope that we can learn from the mistakes of the past. At least market analysts get to work indoors and keep their hands clean.\n\n>--Howard Simons, Futures Credit derivatives dealers talk about their market in much the same way spotty t eenagers talk about sex. A lot of people profess to be accomplished experts, but when it really boils down to it, most of them are still fumbling in the dark. \ n\n>--Anonymous trader, "Risk" Based on recent press reports, the current media definition sometimes seems to b e, "a derivatives transaction is any financial transaction in which a large amou nt of money is lost." \n\n>--Mary Shapiro, CFTC Chairman The year was 1994, and as U.S. interest rates reversed direction upward, investo rs everywhere scurried to cover their assets. Some weren't fast enough and a new media star was born - the "derivatives monster." \n\n>--David Nusbaum, "The Sou nd and Fury of Derivatives Losses" A derivative is anything that made a loss in 1994. \n\n>--Nancy Everett, managin g director, Virginia Retirement System Singapore should quit focussing on traders who chew gum and don't flush toilets and watch those who falsely trade futures accounts and bring down banks. \n\n>-Ginger Szala, Futures Of late, each time a market participant suffers a large, newsworthy loss, the te rm "derivatives" is used almost as if it were the explanation.\n\n>--Frank Newma n, acting U.S. Treasury Secretary The concept of derivatives stems back at least to the Bible. In Genesis, God beg an creation by separating light from darkness. Without too much hyperbole, to li mit derivatives is to limit creation. \n\n>--Andrew Davidson, The Wall Street Jo urnal Most people know that Congress has evaded having to define what is a "futures co ntract" or an "option" for the past 75 years (the earliest legislation was in 19 22). Instead it has been left to the courts to separate these instruments from o thers more fortunate to have been spared regulation. Placing this burden on lega lly trained jurists, many of whom chose a legal career precisely because of poor performance in college courses on finance and math, is like using butchers as b rain surgeons. \n\n>--Philip McBride Johnson, Futures The CFTC was established in 1975 to monitor the 82 different futures bought and sold at eight different U. S. exchanges and to insure that a majority of specula tors lose money in an orderly, reasonable, and efficient manner. \n\n>--John Rot hchild, "A Fool and His Money" Well, the broker made money and the firm made money - and two out of three ain't bad. \n\n>--Anonymous Years earlier, as a cashier at McDonald's, I had been trained in the art of "sug gestive selling." If a customer ordered a cheeseburger and fries, I knew to ask "Would you like an apple pie with that?" That strategy worked at Morgan Stanley. If a customer ordered a simple treasury bond, you asked "Would you like a lever aged derivative with that?" \n\n>--Frank Partnoy, F.I.A.S.C.O.