Part 4

Don’t Let One Bad Season Ruin The Farm

For most of the history of human civilization, in addition to being a Hobbesian nightmare, there was little availability for the powerful tools we have today. Over the years, many millions of farmers went out of business because of an anomalous season, a crop infestation, or simply not being able to cover their costs with the crop yield.

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Add to this the volatility of the demand side, and you can see that the most popular profession for many centuries was anything but easy. This is how derivatives should be viewed in the arc of history, not as a financial weapon of mass destruction as Warren Buffett famously said, but rather as an essential tool that human beings have developed to help ensure that one bad season or one bad storm doesn’t ruin the farm (in a metaphorical sense).

While different forms of cross-asset hedging have probably been in use since the beginning of human civilization, the first financial instrument developed explicitly as a tool for mitigating risk was likely at the rice exchange in Osaka many centuries ago. The first stock exchanges in the Low Countries also saw a rapid proliferation of risk management tools that we may deceive ourselves into thinking our wholly modern innovations.

Don’t Let One Bad Season Ruin The Farm