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In 'The unintended consequences of banning derivatives in asset management', a 'finance-fiction' study on the ban of derivatives from the asset management industry, Alessandro Beber, professor in finance at Cass Business School in London, and Christophe Pérignon, associate professor of finance at HEC Paris, argue that fund managers should remain free to select both plain vanilla and exotic derivatives instruments that best suit the interests of their investors.
Beber and Pérignon argue that the "alleged opacity and lack of regulation" for derivatives trading is "largely overstated", as the regulator imposes transparency on final payoffs and strict risk-measurement requirements on the full spectrum of potential risks – from market to counterparty to liquidity risk.
The authors also contend that the asset manager should be considered a professional investor, as opposed to a "naïve" derivatives user. "As a result of all these factors, there is no evidence derivatives are used to implement unwarranted risky bets in asset management", they say.
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Study: The unintended consequences of banning derivatives in asset management
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