Stories by Peter S. Cohan

Derivative Function

You may think the world of derivatives is too esoteric for a regular business. It's not. Say you're the treasurer of a construction equipment distributor. A Russian company wants $5 million worth of dump trucks, but it can pay you only in rubles. You fear the ruble will drop by the time payment goes through, so as insurance, you place a complex bet, called a currency swap. To execute this swap, your bank finds a counterparty who is willing to bet that the value of the ruble will rise. If it does, the counterparty keeps the difference; if not, it covers your loss.