Unstable Futures: Controlling and Creating Risks in International Money

Abstract

Increasingly volatile interest and exchange rates turn profits into losses as entirely external forces transform the cost of borrowing or the 'value' of products. For example, a firm which priced exports at one exchange rate may see substantial profits turn into losses solely on the basis of revaluation of currencies. Banks and brokers responded to this environment by developing products which allow firms to 'hedge' their financial exposure and protect themselves against adverse market moves. This essay explores the growth and implications of derivatives, arguing that although individual institutions tend to use them to offset or control risk, the aggregate impact of derivatives for the financial system is to increase it. The essay goes on to explore the emergence of concern among regulatory authorities, particularly following the collapse of Barings Bank, that derivatives have the potential to undermine global finance. While the putative regulatory order enhances control, I argue that ultimately it is based on a liberal logic which eviscerates itself.