Derivatives can ‘level the playing field’

Trading in derivatives by US electric and gas utility companies levelled the playing field and had a positive effect on the value of their organisations, researchers at Michigan State University have found.

Using derivatives to manage risk meant that companies operating in unstable-weather places had equal value to those in stable-weather locations.

A derivative is a financial contract designed to help companies hedge against risk. Some commentators have claimed the overuse and excessive trading in derivatives was one of the triggers of the 2008 financial crisis.

But the report’s authors say that when used wisely, derivatives should not be discounted as a potential instrument for company growth, although they did not advocate deregulation.

The study was based on comparing the value of publicly-traded shares in electric and gas utility companies, both before and after a weather derivatives market opened in the late 1990s.

Read more at Michigan State University and Stanford University