Debunking Derivatives Delirium

1. Define the following terms used in the reading:
   1. over-the-counter derivatives
   2. notional value
   3. credit exposure
   4. dealer bank
   5. capital

2. Is it appropriate to use the notional value of derivatives to measure the risk to which banks are subject? Why? How large is the credit exposure of the 10 banks that hold the majority of derivatives in the U.S. banking system?

3. What is an interest-rate swap? How does such a swap typically work? Who might the parties to the swap be, in addition to the dealer bank?

4. Has the growth in the use of derivatives made banks more stable and less risky, or the opposite? Discuss. How do the authors respond? What evidence do they cite to support their view?

Source: "Debunking Derivatives Delirium." Jeffery W. Gunther and Thomas F. Siems, Federal Reserve Bank of Dallas Southwest Economy, March/April 2003, pp. 1, 5-9.