We can illustrate this with several examples. We have already noted how Regulation Q, which limited bank deposit interest rates, spurred the growth of the money market industry. It also was one reason for the birth of the Eurodollar market. Eurodollars are dollar-denominated time deposits in foreign accounts. Because Regulation Q did not apply to these accounts many U.S. banks and foreign com- petitors established branches in London and other cities outside the United States, where they could offer competitive rates outside the jurisdiction of U.S. regulators. The growth of the Eurodollar market was also the result of another U.S. regulation: reserve requirements. Foreign branches were exempt from such requirements and were thus better able to com- pete for deposits. Ironically, despite the fact that Regulation Q no longer exists, the Eu- rodollar market continues to thrive, thus complicating the lives of U.S. monetary policymakers. Another innovation attributable largely to tax avoidance motives is the long-term deep discount, or zero-coupon, bond. These bonds, often called zeros, make no annual interest payments, instead providing returns to investors through a redemption price that is higher than the initial sales price. Corporations were allowed for tax purposes to impute an im- plied interest expense based on this built-in price appreciation. The governments technique for imputing tax-deductible interest expenses, however, proved to be too generous in the early years of the bonds lives, so corporations issued these bonds widely to exploit the re- sulting tax benefit. Ultimately, the Treasury caught on and amended its interest imputation procedure, and the flow of new zeros dried up. I. Introduction 1. The Investment Environment The McGraw−Hill Companies, 2001           UNDERSTANDING THE COMPLEX WORLD OF DERIVATIVES       What are derivatives anyway, and why are people saying such terrible things about them? Some critics see the derivatives market as a multi- trillion-dollar house of cards composed of interlocking, highly leveraged transactions. They fear that the default of a single large player could stun the world financial system. But others, including Federal Reserve Chairman Alan Greenspan, say the risk of such a meltdown is negligible. Proponents stress that the markets hazards are more than outweighed by the benefits derivatives provide in helping banks, corporations and investors manage their risks. Because the science of derivatives is relatively new, theres no easy way to gauge the ultimate impact these instruments will have. There are now more than 1,200 different kinds of derivatives on the market, most of which require a computer program to figure out. Survey- ing this complex subject, dozens of derivatives experts offered these insights: Q: What is the broadest definition of derivatives?