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Part 2: The New Laws > Derivatives

Chapter 5. Derivatives

Derivatives are exerting a growing influence on share prices.

In past centuries, a host of charlatans and colorful characters spent considerable time and effort trying to convince the masses that they could turn lead and other base metals into gold. While these would-be alchemists failed in their quest, attempts to convert simple matter into something more valuable have been a popular pursuit for years. Most such endeavors, of course, have turned out to be nothing more than wishful thinking or elaborate shams. Nonetheless, some would argue that the development of derivatives represents a breakthrough of sorts. In effect, these “synthetic” instruments—created almost out of thin air—appear to allow additional value to be wrung out of a wide variety of securities and commodities. Although there is some debate about whether the phenomenon has, in fact, opened a Pandora’s Box, the modern sector’s dramatic expansion—as can be seen in Figure 5.1—and its increasingly widespread influence on share prices is a revolution that most equity players ignore at their peril.


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