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It’s hard to understand the countless types of derivatives and how they are differentiated from non-derivative transactions.  So if someone writes an article explaining the topic in as near plain English as possible, its worth reading.  About the last place you would expect to find an understandable article on this topic is in a law review.  However, that is exactly what Timothy Lynch, a visiting professor at Indiana University, has done.  His article – “A Twenty-First Century Understanding of Derivatives” – will be published shortly in the Loyola University Chicago Law Journal.

While useful in understanding the structure and definition of derivatives transactions, I doubt Mr. Lynch’s primary conclusion, that derivative contracts entered into purely between speculators should be void based on public policy grounds, will be universally accepted.  Some will argue purely speculative transactions have social utility (probably the same people who argue insider trading should be legal) by providing liquidity and price discovery.  After all, it may not be the fact that some derivatives are entered into for speculative purposes is bad, but the volume of trading by speculators versus non-speculators is what matters.

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