Overview

The title of this chapter is taken from the worldwide bestseller Against the Gods The Remarkable Story of Risk by Peter L Bernstein. This excellent book highlights many interesting facts about the approach to risk including an ingenious bond issued by the Confederates in the US Civil War that encompassed several attractions for potential investors. The risk was, of course, that the Confederate States would lose and the bonds would become worthless. To overcome that risk issue the bonds were convertible into cotton and the payments would be in either pounds sterling or French francs. Thus an early 'derivative' incorporated an insurance policy. The constant search for investment that is safe yet still provides an adequate return occupies the minds of investors and the providers of the instruments for the investment. Financial markets are essentially a remarkable story of risk in their own right, as several high-profile events have proved. The crazy speculative investments of years ago are mirrored to some degree by the crazy investment in hugely overpriced technology and communication companies in the last few years. The dot-com bubble made many staggeringly rich at the expense of the many more losers. Yet it would be wrong to consider that financial markets are solely about the investment risk. Any investment carries an element of risk that is not connected with the mechanics of the market, i.e. price, but is related to...