Friday, May 23, 2008
Why derivatives are getting much more dangerous
MoneyWeek: Why derivatives are getting much more dangerous
The total ‘value' of global derivatives - financial instruments which are priced on the back of the underlying assets that they track - has now reached a breathtaking $596 trillion. And there are some very good reasons to be worried by this figure.
Posted by damien @ 02:48 PM (548 views) Add Comment
4 Comments
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1. Still Renting said...
Articles like this love to focus on the notional value, but it doesn't really mean anything in this context. For example, I'm looking at a report on some derivatives postions right now. 27 trades with a total premium of just over $50mm, which is the most we can lose on those trades. However, the notional value of those 27 trades is $3bn. That number is useful for calculating all sorts of things, but by itself it doesn't tell us anything interesting.
2. malct said...
Quote:-
So when the Bank for International Settlements (BIS) tells us that last year the total derivatives market grew by 44%, its fastest pace since the Basel-based bank started keeping records just over ten years ago, up go the antennae straightaway. And when that figure of $596 trillion crosses the radar screen, equivalent to more than nine times world GDP, the numbers are looking quite scary.
and
When I wrote on this subject before, one respondent claimed that the topline numbers aren’t important because derivative markets are beautifully balanced. His theory was that if every derivatives position were hedging a risk relating to a specific transaction or asset, then derivatives would actually stabilise the world economy. All those noughts would be good news.
Sounds a bit too good to be true. And there are three reasons to be sceptical about this optimistic line of thinking.
Three reasons to be worried
Firstly, . . .
3. malct said...
1. Still Renting said...
Articles like this love to focus on the notional value
I think you'll find the author is aware of this.
4. Hardlianotion said...
The problem is not derivatives in themselves, so much as unscrupulous sales people. Most financial contracts, from insurance to mortgages to over-the-counter derivatives deals have a large population of people who are notionally fit to take on risk, but do not understand what they are being sold, by people who have no incentive to help them make an informed decision, rather the reverse.