Well, options are everywhere, it's not just in stock options. I mentioned farm options, but there's option value in other things as well. Mortgages involve an option to default. Now, in the United States, we have 50 states in the United States of America, and each has it's own mortgage regulator. And some states are called recourse states, and some are called non-recourse states. So here in Connecticut, we live in a recourse state. What that means is, if you buy a house and take out a mortgage to borrow, to get the house and then you stop paying. The mortgage lender can go after you, they can garnish your paycheck they can do legal proceedings to make you pay. In a non-recourse state such as California, when you fail to pay on your mortgage, you default on your mortgage. The lender has only the right to evict you from the house and take the house, but cannot go after you further. So in a non-recourse state, a mortgage is really an option of sorts. You can always just walk away from the mortgage. In fact, you can do something that's called jingle mail. You take the keys to your house, you put them in an envelope, and you mail it to the mortgage lender. And you say, I'm outta here, take the house. That's not a right in Connecticut. Options are very old, as I said, but exchanges for options are not so old. In fact, we didn't have an options exchange until 1973, when the Chicago Board Options Exchange separated itself from the Chicago Board of Trade and started the first options exchange. And then, they had standardized options. When I showed you that Dutch option from 1730, something was standardized. The form was standardized, but it didn't have a standardized stripe price or exercise date, because those were to be filled in. The problem with those Dutch options in 1730 is that you didn't even know what the market price was. They didn't even have telephones on how they can figure out a price. The broker would be trying to get you a good price by word of mouth somewhere. He'd walk into the stock market and talk to people there. But now we have Options Exchanges, and now they're traded on stock exchanges as well, and futures exchanges. >> So Professor Sheer, actually on the topic of options for average investors. There's a lot of different financial instruments on the market, like ETFs for example. A lot of them incorporate options, other derivative contracts into their portfolios. And so are these kind of investments potentially dangerous on the market for retail investors who may not know they're investing in a derivative instrument when they're buying an ETF or something else. >> Yes, there are concerns. Derivatives have been called weapons of mass destruction. >> [LAUGHS]. [LAUGH] And because they might be subject to crashes in a crisis. That's what happened in 2008 subprime crisis, that people had engaged in swaps that, later, the counterparty was about to go bankrupt so maybe the swap didn't work and it led into a whole quagmire of problems of interdependency. So the Dodd Frank Act created in Washington, the Office of Financial Research, to try to look at the macro instability. Other countries have similar acts. There's a lot more attention now, the Financial Stability Board in Switzerland is paying attention to these issues and talking about how we can make the system more stable. The problem with derivatives is that they increased so rapidly that the data collection about them fell behind and the regulators weren't up to date on all of the issues. But on the other hand, derivatives have a useful purpose, just as insurance has a useful purpose. So when you insure your house against fire, that's a good thing to do. And now you can buy a put, not on your house, but your real estate community, now at the Chicago Mercantile Exchange. These kinds of things are developing. And it may lead us into a better society. And a way to put a bottom line on it is, they lower inequality. People think inequality is something that only the government, can deal with. But actually, the biggest arsenal against economic inequality, is not the government. It's the insurance industry. That helps people from being hit by health problems or fires on their house or other things that make for painful inequality.
