THE DERIVATIVES MARKET

Derivatives are "investment instruments" whose value is linked to or "derived" from some other security. Derivatives are an extremely high-risk form of market speculation, nonetheless, they have become in recent years one of the largest markets in the world. The size of the derivatives market was estimated at $55 trillion in 1996. More often than not, derivatives are linked to very complicated speculation in the currency markets.

For example, one PEARL derivative (a derivative marketed by Morgan Stanley) was linked to its principal multiplied by the change in the U.S. dollar over a particular period of time, plus twice the change in the value of the British pound, minus twice the change in the value of the Swiss Franc. Every major mutual fund in the country is in the derivatives market. Not only that, but most major corporations are into it up to their necks.

The sad fact of the matter is, no matter how conservatively people attempt to "buy into" today's stock market by "buying into" "blue chip" companies like Mobil, Ford, GM, Procter and Gamble, Colgate-Palmolive, DuPont, etc., most are also unwittingly buying into the derivatives market as well.

Why? - because most of these companies are heavily "invested" in the derivatives market. Unfortunately, the battlefield of the derivatives market is littered with victims: Orange County, Barings Bank, Daiwa Bank, and the Sumitomo Corporation, to name but a few.