Financial losses due to financial derivatives: A problem of technology transfer

Financial derivatives represent a new technology for the financial services sector. Large and widely publicized financial losses by end users of financial derivatives (e.g., Barings Bank, Procter and Gamble) may be attributed to two major problems in transferring this technology from derivatives dealers to derivatives users: (1) valuation of derivatives; and (2) control systems to manage this new financial technology. Some effective solutions to these problems are being developed by private standard setting organizations and private firms; these solutions can be viewed in terms of non-product standardization and product standardization, respectively. The effectiveness of these solutions in facilitating technology transfer comes from involvement of all stakeholders (e.g., dealers; users; private standard setters; government regulators). The authors with to thank Dr. Francis W. Wolek, Professor of Management at Villanova University, for reading an earlier draft of this paper. The authors are also grateful to Dr. Albert Link and the anonymous reviewers for thier helpful comments.