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The 600 Trillion Derivatives Emergency Meeting

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rchiu

Diamond Member
Jun 8, 2002
3,846
0
0
Derivatives is absolutely needed in the global financial market. The thing is we need an international body to oversee and regulate it and it needs to be more transparent, but it is easier said than done obviously.
 

ICRS

Banned
Apr 20, 2008
1,328
0
0
Originally posted by: rchiu
Derivatives is absolutely needed in the global financial market. The thing is we need an international body to oversee and regulate it and it needs to be more transparent, but it is easier said than done obviously.
We have ISDA which helps oversee it.
 

Dari

Lifer
Oct 25, 2002
17,134
38
91
Originally posted by: rchiu
Derivatives is absolutely needed in the global financial market. The thing is we need an international body to oversee and regulate it and it needs to be more transparent, but it is easier said than done obviously.
Where's the fun in regulation?
 

Lemon law

Lifer
Nov 6, 2005
20,984
2
0
Originally posted by: Dari
Originally posted by: rchiu
Derivatives is absolutely needed in the global financial market. The thing is we need an international body to oversee and regulate it and it needs to be more transparent, but it is easier said than done obviously.
Where's the fun in regulation?
------------------------------------------------------------------------------------

Who says there should be any fun or pleasure in regulation.

But Jhhnn nailed when he pointed out "The problem with derivatives is that they often leverage rather than insure. If I feel that I'm insured against loss on a particular deal, then I can engage in other deals that my capitalization wouldn't otherwise support. Spread that sort of thinking industry-wide, and the risk becomes systemic. Everybody's depending on everybody else to pay off when things get ugly, but nobody really has the money to cover. I depend on party A to pay me, he depends on party B, who depends on party Z, who depends on me...

It's all peachy on the way up- being leveraged at 30:1 means I can make $30M from a deal that would otherwise only net $1M, and it also means I can lose $30M... except I never had $30m in the first place... neither did the guys who insured me, either...

The whole concept of leveraged hedging has been likened to picking up pennies in front of a steamroller, lots of pennies. If you slip a little, or if the steamroller gains speed unexpectedly, you're a goner..."
-------------------------------------------------------------------------------
Its not just a matter of outright theft in derivatives, its more like the sorcerer's apprentice, these financial guru's think they are in control, and the next thing they know, they have bet everyone's else's money and that is not even enough to pay off all the bets. And if these bets are not paid off, the whole banking system goes down the toilet throwing the entire world into a depression.

We have to make these common sense regulations or we will get burned. Its no fun, but its ever so necessary.
 

ICRS

Banned
Apr 20, 2008
1,328
0
0
Originally posted by: Lemon law
Originally posted by: Dari
Originally posted by: rchiu
Derivatives is absolutely needed in the global financial market. The thing is we need an international body to oversee and regulate it and it needs to be more transparent, but it is easier said than done obviously.
Where's the fun in regulation?
------------------------------------------------------------------------------------

Who says there should be any fun or pleasure in regulation.

But Jhhnn nailed when he pointed out "The problem with derivatives is that they often leverage rather than insure. If I feel that I'm insured against loss on a particular deal, then I can engage in other deals that my capitalization wouldn't otherwise support. Spread that sort of thinking industry-wide, and the risk becomes systemic. Everybody's depending on everybody else to pay off when things get ugly, but nobody really has the money to cover. I depend on party A to pay me, he depends on party B, who depends on party Z, who depends on me...

It's all peachy on the way up- being leveraged at 30:1 means I can make $30M from a deal that would otherwise only net $1M, and it also means I can lose $30M... except I never had $30m in the first place... neither did the guys who insured me, either...

The whole concept of leveraged hedging has been likened to picking up pennies in front of a steamroller, lots of pennies. If you slip a little, or if the steamroller gains speed unexpectedly, you're a goner..."
-------------------------------------------------------------------------------
Its not just a matter of outright theft in derivatives, its more like the sorcerer's apprentice, these financial guru's think they are in control, and the next thing they know, they have bet everyone's else's money and that is not even enough to pay off all the bets. And if these bets are not paid off, the whole banking system goes down the toilet throwing the entire world into a depression.

We have to make these common sense regulations or we will get burned. Its no fun, but its ever so necessary.

Would you call this a proper use of a derivative.

I have fixed rate assets which I sold put options with.
I have variable rate debt which I purchased call options with.

I purchase a float to fix swap with a call swaption to try to turn my variable rate debt into fixed rate debt.

I say this is a great way to use derivatives.

This example is one of the most common and generic uses for derivatives.
 

chess9

Elite member
Apr 15, 2000
7,748
0
0
Originally posted by: ICRS
Originally posted by: rchiu
Derivatives is absolutely needed in the global financial market. The thing is we need an international body to oversee and regulate it and it needs to be more transparent, but it is easier said than done obviously.
We have ISDA which helps oversee it.
Bwuaahahahaha!
Right, and they are so tough....

-Robert
 

GeezerMan

Platinum Member
Jan 28, 2005
2,096
3
81
Since we have some guys who work with derivatives in this thread, how about some opinions as to what will happen in the near future with the bailout plan?
 

gevorg

Diamond Member
Nov 3, 2004
5,075
1
0
"Saying there's $668 trillion in derivatives floating out there is like saying every lottery ticket sold is worth the full value of the jackpot. If the jackpot is $100 million and lottery organizers sell 2 million tickets, "that's $200 trillion worth of lottery wealth that's circulating!"

http://www.newsweek.com/id/164591
 

MadRat

Lifer
Oct 14, 1999
11,661
43
91
Originally posted by: LegendKiller
Originally posted by: MadRat
They used to call things like derivatives by colorful phrases such as "Pyramid" schemes.
They used to call people like this by colorful phrases such as "ignorant", "stupid", "moronic", "knuckle dragger", now they just call them "MadRat", or "davemcowen".
They used to ban people for blatant ad hominem. The good ole days...

Derivatives are used in such a way as it becomes a pyramid scheme. The complexity that hides the very nature of derivatives are merely an eloquent game. As long as one doesn't get left holding the losing stick so to speak then the game always seems good. But in the long term most people are not going to win in this game so overall it is bad for the majority.
 

ICRS

Banned
Apr 20, 2008
1,328
0
0
Originally posted by: MadRat
Originally posted by: LegendKiller
Originally posted by: MadRat
They used to call things like derivatives by colorful phrases such as "Pyramid" schemes.
They used to call people like this by colorful phrases such as "ignorant", "stupid", "moronic", "knuckle dragger", now they just call them "MadRat", or "davemcowen".
They used to ban people for blatant ad hominem. The good ole days...

Derivatives are used in such a way as it becomes a pyramid scheme. The complexity that hides the very nature of derivatives are merely an eloquent game. As long as one doesn't get left holding the losing stick so to speak then the game always seems good. But in the long term most people are not going to win in this game so overall it is bad for the majority.
This isn't true at all. Derivatives most of the time are used to protect a company against interest rate risk. They usually lower the overall risk for the company.
 

chess9

Elite member
Apr 15, 2000
7,748
0
0
Originally posted by: MadRat
Originally posted by: LegendKiller
Originally posted by: MadRat
They used to call things like derivatives by colorful phrases such as "Pyramid" schemes.
They used to call people like this by colorful phrases such as "ignorant", "stupid", "moronic", "knuckle dragger", now they just call them "MadRat", or "davemcowen".
They used to ban people for blatant ad hominem. The good ole days...

Derivatives are used in such a way as it becomes a pyramid scheme. The complexity that hides the very nature of derivatives are merely an eloquent game. As long as one doesn't get left holding the losing stick so to speak then the game always seems good. But in the long term most people are not going to win in this game so overall it is bad for the majority.
No! Good grief, read the Newsweek article. It's Derivatives for Dummies. :)

-Robert
 

LegendKiller

Lifer
Mar 5, 2001
18,256
68
86
Originally posted by: chess9
Originally posted by: MadRat
Originally posted by: LegendKiller
Originally posted by: MadRat
They used to call things like derivatives by colorful phrases such as "Pyramid" schemes.
They used to call people like this by colorful phrases such as "ignorant", "stupid", "moronic", "knuckle dragger", now they just call them "MadRat", or "davemcowen".
They used to ban people for blatant ad hominem. The good ole days...

Derivatives are used in such a way as it becomes a pyramid scheme. The complexity that hides the very nature of derivatives are merely an eloquent game. As long as one doesn't get left holding the losing stick so to speak then the game always seems good. But in the long term most people are not going to win in this game so overall it is bad for the majority.
No! Good grief, read the Newsweek article. It's Derivatives for Dummies. :)

-Robert
Why read it? He'd rather run around the internet claiming to be smart despite all evidence to the contrary.

gevorg's post above about the lottery ticket is a very apt comparison.

Most derivatives have very valid uses and are used in very valid ways. Even speculation provides liquidity. Although I would agree that some of them are getting out of hand (oil, among others).
 

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