Economics of Derivatives

My co-authored book, ‘Economics of Derivatives’ with Dr. T.V. Somanathan and published by the Cambridge University Press was officially launched on 14th March this year in Bangalore at a lovely function, made all the more memorable by the presence and erudition of Mr. C.B. Bhave, former SEBI Chairman. On March 15, Dr. Rangarajan, former Governor of the Reserve Bank of India and many other distinguished positions, launched the book in Chennai.

Appended below are some publicity material about the book from the website of Cambridge University Press:

While most books on derivatives discuss how they work, this book looks at the contributions of derivatives to overall economic well-being. It examines both the beneficial and adverse effects of derivatives trading from the perspectives of economic theory, empirical evidence and recent economic history. Aiming to present the concepts in a fair, non-ideological, non-mathematical and simple manner, and with the authors’ own synthesis, it draws on economic insights from relevant work in other disciplines, particularly sociology and law. The book also presents some new theoretical ideas and recommendations towards a pragmatic and practical approach for policy-makers. The ultimate objective is to provide a basic conceptual framework which will help its readers form a judgment on whether, when and how derivatives are beneficial or harmful to the economy.


Foreword by Bertrand Badre, Managing Director, World Bank;



1. Introduction

2. Definition and typology

3. The Economic functions of derivatives markets

4. Market completion

5. Derivatives and price stabilization

6. Derivatives and price destabilization

7. The effects of derivatives on prices of the underlying: A synthesis

8. Causes of the rapid growth in derivatives trading: A historical perspective

9. The role of derivatives in the global financial crisis of 2008

10. Models and their effects on markets

11. Derivatives and emerging markets-I

12. Derivatives and emerging markets-II

13. Regulation of derivatives

14. Derivatives and development: A critique

15. Regulatory policy for derivatives: A pragmatic approach Index


“Derivatives are beneficial in small quantities and toxic in large volume. This book, rooted in deep knowledge of both markets and policy-making, shows how to handle the dilemmas this creates.”

—John Kay, London School of Economics

“Simple yet lucid, comprehensive without being unmanageable, and practical while retaining analytical rigour. This book is an absolute must for those trying to make sense of derivatives and those trying to regulate them.”.

—Arvind Subramanian (formerly, Peterson Institute for International Economics), Chief Economic Adviser, Government of India

“The ‘value add’ of derivatives remains contentious. … This outstanding book synthesizes the debate and presents a much needed balanced view that should inform policy-making in both advanced economies and emerging markets.”

—D. Subbarao, Former Governor, Reserve Bank of India

“This unique, fascinating and eminently readable book presents a synthesis of theory, empirical evidence, market practices and case studies and provides an outstanding analytical framework for policy making and implementation.”

—Y. V. Reddy, Former Governor, Reserve Bank of India

“Hundreds of books have been written on derivatives; this unique book fills a very important gap by taking a step back to offer a framework for analyzing the societal cost and benefits. Any academic, practitioner, policy maker or serious student of financial history must find a place for this on their bookshelf.”

—Hossein Kazemi, University of Massachusetts

“Derivatives are creative in the hands of the artist, destructive in the hands of the artful. This much-needed book raises the standard on realistic, professional assessment of a much misunderstood subject. I totally recommend it as a textbook and a handbook for policy makers.”

—Andrew Sheng, former Chairman, Securities and Futures Exchange Commission, Hong Kong

T.V. Somanathan is Director at the World Bank, Washington and a member of the Indian Administrative Service. His doctorate in economics was on the subject of commodity and financial derivatives. He is a Chartered Accountant, Chartered Management Accountant & Chartered Secretary. With over 27 years’ experience in the World Bank (having joined under the Young Professionals Program) and Union and state Governments in India, he combines academic rigour with practical experience in economics, finance, public policy and regulation. He has published a book (Derivatives, McGraw Hill Education 1998) and more than 80 papers, articles and book chapters.

V. Anantha Nageswaran holds a doctorate in finance (on exchange rate behaviour) and has over two decades of experience in global capital markets with leading financial institutions such as UBS, Credit Suisse, and Bank Julius Baer. He is an adjunct faculty on international finance and economics at the Indian Institute of Management Bangalore and Singapore Management University. He is a weekly columnist for Mint, a regular contributor to CNBC, Reuters and Bloomberg television networks and is also a co-founder of the Takshashila Institution.

You can watch the full video of the book launch function in Bangalore here. A shorter version is here. The video is worth watching for the insightful remarks of Mr. Bhave.

Dr. Somanathan will be joining the PMO later this month.


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