Abstract

The true cost of OTC derivativesSince the breakdown in the early 70’s of the postwar Bretton Woods fixed exchange rates and the achievements of Black, Scholes and Merton in obtaining a satisfactory theory of option pricing almost simultaneously, banking globally has undergone sweeping transformations at an ever increasing pace. After briefly surveying financial market developments from 1980 to the present, the role of structured over-the-counter derivatives in this advance will be examined in some detail. Previous extensive technical consultancy to leading banks on structured derivative products has been followed since the crisis by expert witness work for clients—individual, commercial and governmental—who have purchased these OTC products to their cost. This recent and ongoing experience has been an eye opener which I shall detail with numerous real examples. The presentation will go on to discuss our pricing methodology for these examples and close with some comments on the evolving global regulation of structured OTC derivatives.