Thursday, Nov 22, 2007
What's a derivative???
Telegraph: FTSE battered as Northern Rock faces relegation
Beleaguered Northern Rock is facing the humiliating prospect of being relegated from the FTSE 100 straight to the Smallcap index. Such a dramatic decline has not been seen since the dotcom bust.
Sub-prime worries affected other lenders and homebuilders, and derivatives are now pricing in a 7% fall in house prices next year.
Posted by little professor @ 12:07 AM (540 views) Add Comment
7 Comments
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1. New User 2007 said...
Derivatives are volatile and are really just traders making bets with each other (they will probably close their position before we even reach 2008) i.e. nothing to get excited about. I think interesting nevertheless.
However, please note that Northern Rock management may be pond scum, and that their clients (BLT) are similar, BUT there are plenty of pensioners who just happened to have held onto the free shares they were given when it demutualised 10 years ago.
2. dohousescrashinthewoods said...
Apparently their call centre is now very quiet indeed. No one wants to borrow from them so PPI commissions are down too.
3. planning4acrash said...
7%? And the rest!! I'd put money on prices falling more than 10%. This correction will be short sharp and sweet in its initial shock wave.
4. Orwell said...
We shall see...
5. Ihopeitgoeswithabang said...
It has to be said who in their right mind would get a mortgage with NR now?
Who wants the hassle of dealing with the unknown in months to come. With so many lenders out there it is just not worth the worry.
On the funny side of it I have a friend who believes house prices will never go down - he constantly preaches about it and why.
He also bought £1,000 worth of NR shares a month or so ago because "they were sooo undervalued" and he was "guaranteed" to make a killing on it when all those people rush forward to buy NR.
6. techieman said...
Actually I dont think this was a real question. If it was then im afraid NUser has got it a bit wrong. A derivative is an instrument that derives its value from the price of the underlying security / asset etc. You can have derivatives on anything from Oil futures to Pork Bellies (yes that wasnt made up by Eddie Murphy in trading places). Derivatives can be used as both a hedge and for speculation. For example the futures price of oil may be some dollars above the spot price. Someone who needs some oil in the future may hedge against the price by buying a future now (for example and this is "crude" - pardon the pun - a paint manufacturer), someone else (say an oil producer) may wish to lock in a price and sell forward. However NUser is right to an extent - a trader "without paper" may buy Oil futures as a speculative punt on the expectation of an increase in price. Then you get options on futures wich give the right but not the obligation to buy (call) or Sell (put) at a pre-determined (strike) price.
Futures CAN and DO drive the underlying market. For example S&P futures, as players can arb the cash against the derivatives. However the problem is one of using an asset against which to hedge. For oil for example thats easy - a barrell of crude is a barrel of crude, although there would not necc. be a 100% correlation between the price of crude and - in my example - the oil used for paint manufacturing. However the problem for a house price index (in terms of hedging) is that your house may not correlate to the index. Which means you have a correlation risk.......
7. New User 2007 said...
Yup, sorry, I was referring to the speculative side rather than the hedging side and what you say works for products that can actually be traded (even shares in property companies), but I assume none of these guys have any plan to actually buy and sell any property, so they will need to close their positions before expriy?