These highwaymen all must be riding Jesse James' horse.
Larry D. Kump
Falling Waters, W.Va.
Editor's note: Larry D. Kump is a candidate for the 52nd District in the West Virginia House of Delegates.
Derivatives aren't as evil as they say
To the editor:
The mass-scale ignorance on derivatives has made it easy for news outlets to demonize these products. The unfortunate outcome of this is that people are not informed of the benefits derivatives create. As a result, Congress passed financial overhaul that will increase costs and volatility for everything from the price of corn to insurance premiums.
One reason why derivative products are not as evil as they are presented is because they can decrease volatility. A futures contract, for example, is an agreement between a seller and a buyer to provide and buy a good at a future date at a set price. This results in lower risks of fluctuations in future prices because a price has already been struck for a future date. Buyers, sellers and consumers are able to better plan ahead due to greater price stability.
There are also derivatives called options. An option gives one the right to buy or sell a stock at a set price in the future. Through options, people are able to hedge against risks. If one buys a stock for $20 and one is afraid of a price decrease, one can hedge against that risk with a put option.
The insurance industry actively uses derivatives to decrease risk. Paid premiums do not stay stagnant in a vault, they go into investments to bring back a return. To make these investments safer, companies can purchase derivatives to protect investments from fluctuations.
Despite the bad reputation derivatives have received over the past couple of years, they do indeed have numerous and extremely important benefits. Our lives are all improved with lower and more stable insurance premiums and commodity prices. Unfortunately, the financial overhaul bill will increase the cost of derivatives, increasing all of our costs of living for years to come.