For those looking for a particularly dry and cerebral economic analysis of the derivatives market and whether the “$1.4 quadrillion” in derivatives poses a threat to the global economy, my I recommend you pour yourself a stiff drink and watch this.
However, in all fairness and honesty I must warn you it is NOT a great opening topic to pick up chicks at the bar.
I’m going to the bar after reading this, so by the way, what is a great opening topic?
If you have a decent bank balance, start with that….then get into derivatives.
You could tell the young lady that extreme pleasure is the derivative of acceding to your advances.
Couldn’t watch it but don’t fear derivatives because every loser is matched with a winner so the market won’t be destroyed but an individual investor sure could. That is filed under tough tittie.
Hey Baby … I would like to derive some pleasure from you for a minimal 2% investment … *slap* … bu, bu, but, baaaa bey … I’s talkin bout leverage … *slap*
Derivatives allow those nice juicy 2-3% mortgage rates y’all are so hooked on… Eliminate derivatives, and see 8-10% rates, and the associated crash in house prices that will wipe a lot of peoples’ main retirement savings plan… Oh and get ready then for a five-fold hump in insurance rates across the board, plus massive currency and liquidity issues…
But ooh, stubble-jumpers, so derivatives bad.
You all do know that derivative notional isn’t actually exposure, right? And that 80% of notional is now CCP traded, and IMed up the wazoo, right?
Ex-trading risk regulator here….
The truth about derivatives is they aren’t worth much unless they are integrated over time.
actually scar, the ‘market’ can most assuredly be destroyed by the concentration of wealth in the hands of a tiny tiny few. the vast majority whose trading behaviour is the thing that ‘levels it all out to a zero sum game’ are wiped out.
the world economy is a colossal ponzi scheme. when did that benefit more than the top early entrants?
do NOT endow the almighty ‘market’ with more than its due. the ‘market’ is subject to all kinds of mischief. how long has insider trading existed? see what I mean?
my experience with derivatives?
late 90s I was programming for an outfit called Fotprint Software (since acquired by IBM). first day or so Im reading up on wtf a derivative is. the example describes the delightful scenario whereby a trade is effected by the securities lending that the software managed. party A buys stock from party B. the broker is allowed to borrow the exact amount from party C which gets replaced asap. win-win-win. especially the brokers who garner their commissions and the stock lender who is paid a fee.
I immediately spotted a problem; until the stock is replaced, party C cannot trade it. if party C correctly gets wind of something that is going clobber the stock price, ummm, tougho beanso dude. you *loaned* that stock OUT as per the agreement. thus party C gets a tidbit fee for lending the stock so that the original trade can happen, and loses big time for the same reason. aaaaaand, whoever it was who actually borrowed the stock in the interim, pays LESS to replace it. another win for them !!!
Once I got a handle on the task, I once quipped to another programmer, gee, here’s a niche opportunity: ‘insurance’ to cover big losses from the above scenario. oooooohhhh my head is spiiiiiinning !!!! my intro to derivatives, at least one form of them.
ha ha !! ‘Footprint’ Software. south end of Yonge St. Tranna. enough to convince me I NEVER wanted to live there. any time I hear a car horn blaring I tell my company ‘welcome to Toronto’.
Seriously. “Cerebral” was an awfully generous self descriptor for that vid.
SDA, my comment was held. What is wrong with saying the going to vegas and playing roulette is better than buying a derivative?
soixantchose, you’re describing a pretty vanilla transaction. There is equal risk on both legs of the SFT, or any difference is priced into the trade.
In fact, the party who wants to hedge theirr downside writes/buys options, or if they’re more of a flow monster (think derivatives big box store) they may have an equal and opposite trade with a different counterparty, lifting a tidy commission off both sides (sell-side isn’t all nasty hard work!). It gets tricky if an EQ is not liquidly traded, forcing use of options on a suitable index that you hope proxies the option.
The most common form of derivative you’ve not thought of is the IR swap that allows all those fixed rate mortgages to operate. Ever stopped to wonder what risk a fixed-rate mortgage poses to a lender who has to fund himself at floating rates in the ON market?
I profess no expertise but have investigated Wall St./banker/hedge fund corruption and the ostensible gate keepers to prevent fraud and found it to be a very closed club. If you investigate “regulation SHO” and the many twists and turns and denials of the obvious you will probably wind up where am philosophically. There is a common thread from the S & L crisis, thru LTCM, Enron, Lehman, Bear, AIG etc.
It isn’t that the original intent of the system lacked utility and didn’t provide tools to manage risk…the problem is the “ethically challenged” nature of the creators of the system allowed them to “skim” as long as they weren’t too greedy.
It didn’t take too long before other, even more ethically challenged individuals discovered the “secret” and began pushing the envelope. The originators were handcuffed by their own perfidity and struggled to “share” the ill-gotten gains without revealing their culpability.
When the “elite business world” and the “intelligence” world are the same guys and they can read everyone’s mail so to speak, it is just a short hop to weaponized financial instruments and you get what we’ve got.
In my view the diagnosis isn’t the problem, the cure is the challenge.