Podcast: Gambling with financial derivatives
If you gave someone a sum of money, and they agreed to pay you a larger one should a certain outcome happen in the future, you may be forgiven for thinking you're gambling. In fact, you're getting insurance, as discussed in TC Finance.
In another episode of the BBC's 50 Things That Made The Modern Economy podcast, Tim Harford draws attention to the cultural correlation and systemic similarities between today's insurance market and games of chance.
The financial derivatives market, for example, is essentially built on contracts that allow two parties to bet on possibilities for things like the exchange rate or debt repayments. While intended to lower risk, the events surrounding the 2008 financial crisis showed these agreements to still be a gamble.
Tutor Rachel Norman commented: "This podcast looks briefly at the history of the insurance industry. Module 14 of the TC Finance course discusses key concepts, terminology and regulation within the current UK insurance industry and, although the content of the podcast is not examinable, it may provide a useful background to interested students.
"The latter part discusses financial derivatives and compares these with gambling. Derivatives are not discussed until the TPS Advanced Finance course (Modules 21 and 22), where they are covered from a hedging or risk-reduction perspective rather than a perspective of gambling or speculation. It is important to note that the same derivative instruments can be used for either purpose, depending on exactly how they are traded."