Elasticity theory of structuring

TL;DR

This paper develops a theory of product design in financial derivatives to prevent gambling-like effects, addressing criticisms of derivatives as risky or casino-like betting instruments.

Contribution

It introduces a formal framework for structuring financial derivatives to eliminate inadvertent gambling effects, enhancing their safety and legitimacy.

Findings

A new theoretical framework for derivative design.

Identification of naive derivative structures as gambling.

Guidelines to prevent gambling effects in derivatives.

Abstract

Financial derivatives have often been criticized as casino-style betting instruments. It turns out that many naive ways of making them are indeed equivalent to gambling. Fortunately, this inadvertent effect can be understood and prevented. We present a theory of product design which achieves that.