A buffetting for derivatives

Risk analysis

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As has been widely publicised, Warren Buffett’s latest letter to stockholders condemned derivatives as “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal”.1 He claims these instruments introduce little-understood systemic risks that could allow a problem at one firm to snowball into a major economic crisis.

Buffett’s strongest argument relates to situations where there is no real market for a contract and (although he doesn’t make this

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