You can’t help but admire a first-time author who takes on a difficult topic, and succeeds in explaining it in an informative, entertaining way. I’m talking about Erika S. Olson and her new book Zero-Sum Game: The Rise of the World's Largest Derivatives Exchange.
Olson was an eyewitness to the bidding war in 2007 between the Chicago Mercantile Exchange and the Atlanta-based InterContinentalExchange (ICE) for the Chicago Board of Trade. When the Mercantile Exchange and Board of Trade ultimately merged, the result was the financial derivatives powerhouse CME Group.
You’ve heard of derivatives, of course – those little-understood financial instruments that helped bring down American International Group (AIG).
Olson acknowledges that for many people, derivatives are “a mysterious niche of the financial services industry,” one where the participants “fought to remain” an enigma to the outside world “for as long as they could.” While her book is not intended as a detailed study of the derivatives industry – rather, it is to tell the story of a bidding war and merger, and the executives involved – she does delve into how derivatives are created and traded, without drowning the reader in jargon.
Derivatives, she writes, is “the umbrella term for financial instruments like futures and options, which derive their values from their underlying assets” (e.g., corn, gold, etc). These financial instruments can be used by those who need them as a “buffer against fluctuations” in everything from interest rates, orange juice prices, the cost of a barrel of crude oil, and so on.
The title of the book, Zero-Sum Game, may make you think it is a how-to guide on negotiation tactics. The book will certainly be of interest to anyone completing their MBA and slogging through coursework on negotiations, as it brings a real-life merger to life. However, Olson does not try to impose one of those “lessons learned” concluding chapters that authors often feel obligated to provide to readers.
Rather, Olson leaves it to readers to determine their own “lessons learned.” One way this approach benefits Olson’s book is that instead of having to try to “prove” some arbitrary list of “rules” for negotiation throughout her text, she can instead concentrate on what I think was her real objective in the book – to focus on the human element of a business story, an element that is often missing from MBA case studies and similar documents. Zero-Sum Game is very strong when it comes to capturing the role that human emotions play in a high-stakes merger.
My only criticism of this book is that it could have benefited from an appendix or two providing some more information about derivatives and their evolution over time.
Maybe something about how they differ from other risk related financial products like say, insurance.
Olson could also have gone into more detail about how, in her view, the role of derivatives are misrepresented and their economic benefits are frequently misunderstood. Olson might have included more material to help the reader differentiate how derivatives are used to legitimately manage economic risk from how their more exotic varieties can be used to enable what amounts to gambling. Instead of managing risks, this gambling with exotic derivatives can help create risks.
These issues aside, Olson’s Zero-Sum Game: The Rise of the World's Largest Derivatives Exchange is a an entertaining read and well worth your attention.