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3 - Legal and Regulatory Definitions of Derivatives and Other Financial Instruments
Gregory Scopino, Georgetown University, Washington DC
Book:

Algo Bots and the Law

Published online:

02 October 2020

Print publication:

15 October 2020, pp 80-174
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Summary

Now that we have learned about the common economic definitions of futures and other derivatives, it’s time to see how the relevant US laws and regulations define these financial instruments. The legal and regulatory definitions of derivatives and other financial instruments are often different from the common economic definitions of those selfsame instruments. Why is that? Contrary to what one might think, it is not because Congress wants to make life difficult for law students, or to confuse people. Instead, the differences between how various financial instruments are conceptualized in everyday life and how they are described in statutes and regulations are largely (although not solely) the result of Congress trying to make sure that people cannot easily evade applicable laws and regulations by simply creating look-alike financial instruments that would escape the regulatory framework that Congress had intended for such instruments. In many cases, the legal and regulatory definitions of financial instruments are more expansive and ambiguous than the definitions in common usage.

Managing Price Risk in Volatile Grain Markets, Issues and Potential Solutions
Andrew M. McKenzie, Eugene L. Kunda
Journal:

Journal of Agricultural and Applied Economics / Volume 41 / Issue 2 / August 2009

Published online by Cambridge University Press:

26 January 2015, pp. 353-362
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During 2008 extreme price volatility in grain markets led to country elevators incurring unprecedentedly large margin calls on their futures hedges. As a result elevators' traditional liquidity sources and lines of credit were stretched to breaking point. This article explores the potential liquidity benefits of making available an Over-the-Counter Margin Credit Swap contract to grain hedgers. The swap would enable hedgers to draw upon sources of capital outside the farm credit system to provide liquidity needed to make margin calls. Simulation results clearly show that a Margin Credit Swap contract would provide significant liquidity benefits to hedgers during volatile periods.

Credit Risk and Prepayment Option
Philippe Artzner, Freddy Delbaen
Journal:

ASTIN Bulletin: The Journal of the IAA / Volume 22 / Issue 1 / May 1992

Published online by Cambridge University Press:

29 August 2014, pp. 81-96

Print publication:

May 1992
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The paper examines a type of insurance contract for which secondary markets do exist: default risk insurance is implicit in corporate bonds and other risky debts. It applies risk neutral martingale measure pricing to evaluate the option for a borrower with default risk, to prepay a fixed rate loan. A simple “matchbox” example is presented with a spreadsheet treatment.