Any discussion about the financial crisis and risk management involves some theorizing about derivatives. Who better to cast light on the subject than one of the architects of modern risk management, Robert C. Merton, a Harvard Business School professor and a winner of the 1997 Nobel Prize in economics. Merton’s Nobel was awarded in recognition […]
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Summary. Reprint: R0910J In this edited conversation with HBR senior editor David Champion, Merton, a professor at Harvard Business School, casts light on the role of derivatives in the current financial crisis. Merton was awarded the Nobel Prize in 1997 for his part in developing a new method to value derivatives, and after publication of that development, the markets in derivatives exploded: Today, the estimated notional value of derivative contracts exceeds $500trillion. Merton posits that derivatives themselves cannot be the cause of a financial crisis. They are simply tools that can be used either functionally (to reduce risk) or dysfunctionally (in ways that increase risk without offsetting benefits). He also offers prescriptions for making the financial markets safer.
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A version of this article appeared in the October 2009 issue of Harvard Business Review.
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DC David Champion is a senior editor atHBR.Based in France, he is alsoa member of the Academic Committee ofthe European Center for Executive Development (CEDEP) in Fontainebleau.
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