"Derivatives are financial
instruments of mass destruction."
Warren Buffett, the world's most successful investor, Fortune, 17 March 2003
Welcome to the modern world of arcane financial instruments, and perhaps even to the world of the next Great Crash. Derivatives are fiendishly complex, and they cover anything that isn't tangible: the right to buy raw materials at a future date at a set price, or the underwriting of a risk that someone won't be paid by someone else. Derivatives are not about the rate of growth but the rate that growth is growing, and the rate that 'second' growth is growing too.
It's all about offsetting risk - because it's all about buying options on shares rather than the shares themselves - and that can be useful for companies. But derivatives deals that go wrong can multiply losses many times over, and that can be disastrous too.
The first hint of trouble in the early 1990s hit the German company Metallgesellschaft, followed in quick succession by nine-figure losses by Cargill, Procter & Gamble, Daiwa Bank of Japan and Orange County, California - before Nick Leeson's bet on a rising Japanese stock market in 1995 destroyed the 225- year-old Barings Bank.
