Derivatives are the sort of things you
generally only come across in movies about wheelers and dealers in far-away
places like New York and London - but they have a relevance much closer to home.
You may be surprised to learn that the Whangarei
District Council (WDC) has $244.5 million worth of interest rate derivatives. A
council staff member has confirmed ratepayers are exposed to valuation
movements on the full amount. That's a lot of money at risk, and raises many questions
- but more on that later.
Derivatives are complex, but here's a
simple run down on the basics, as I understand they relate to the WDC. A
derivative is a generic term applied to a financial arrangement that derives
its value from another market. These arrangements take many forms (futures,
options, swaps), and very smart individuals sitting in high rise office towers
around the globe keep coming up with new variations so they can enrich themselves
by creating a new market and clipping the ticket on the deals that are done.
