Derivatives are the fastest-growing financial instruments of our time. When used strategically, they can be very effective tools to mitigate risks. When used to speculate, that is, to bet on the inefficiency of financial markets, they can be trouble, especially if you are unaware that you are betting.
On April 28,1995 the Federal Reserve Bank of Boston held an educational forum entitled "Managing Risk in the '90s: What Should You Be Asking about Derivatives?" The daylong forum, presented by experts from nonfinancial corporations, investment and commercial banks, pension funds, issuers of securities, academics, lawmakers, and government regulators, discussed important issues in the management of risk. The speakers outlined a conceptual framework for analysis of derivatives and suggested risk management guidelines for successful use of derivatives. This article is based on the presentations and discussions at that forum.