Matthews Discusses Derivatives at Faculty Lecture

February 13, 2012

Dr. Patricia (Foley ’73) Matthews, dean of the Division of Professional Studies and professor of economics, accounting and business administration at the University of Mount Union, gave the Faculty Lecture on Wednesday, February 8. Matthews, who also serves as the Nolen A. Cunningham Chair of Business and advisor of the Investment Team, presented Derivatives: Friend or Foe?
 
According to Matthews, financial derivatives have become the talk of Wall Street and beyond in recent times due to serious financial losses suffered by state and local governments, well-known corporations, financial institutions and investment firms that have invested in these products. After briefing the audience on the history of derivatives, she explained and that there are just as many derivatives as there are ice cream flavors.
 
“Few of us understand them, and even fewer of us appreciate them,” said Matthews, when discussing the financial instrument.
 
Derivatives, however, are not the instruments of evil as portrayed by the financial commentators and lawmakers. Many have unknowingly invested in these products as part of their investment portfolios. In a way, derivatives are like fire. When properly used, they can provide a great benefit, but if they are mishandled or misunderstood, the result can be catastrophic. Derivatives are not inherently “bad.” When understood and responsibly managed, financial derivatives can be essential tools in risk management.
 
Matthews explained that there are multiple benefits and purposes of derivatives. They provide opportunities for global diversification, help hedge against financial risk, used for price discovery and help reduce market transaction costs. Matthews also reminded the audience that there are risk factors that may be involved.
 
“Financial derivatives are useful in risk control,” said Matthews. “Excessive use can be risky, which is why users must fully understand the complexity and risks.”
 
If used correctly, derivatives can be useful. She gave examples of how companies such as Proctor and Gamble and Barings used derivatives, where their downfall began and what happened to those companies.
 
She also touched on the financial crisis in 2008 and stated that the main cause of the crisis was that banks lent loans for mortgage payments to “risky borrowers.” Those borrowers were buying houses well beyond their means of income.
 
Matthews concluded her lecture by saying, “Derivatives: friend or a foe? You decide.”
 
A member of the Mount Union faculty since 1975, Matthews earned a Bachelor of Science degree in mathematics and French from Mount Union. She also earned a Master of Arts degree in economics and a Doctor of Business Administration degree, both from Kent State University.
 
Each year, a member of the University of Mount Union faculty is selected to give a special lecture relating to interesting or important developments in his or her own field or exploring matters of general concern to the faculty.
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