All types of derivatives are dangerous & can cause serious damage to an economy
Certain types of derivatives are OK, but other, more complex types lead to major trouble
They are not dangerous & should only be the business of those involved
Other (please state)
I, like a poster above me, knows the word derivative from mathematics, and it means NOTHING at all what it means in finance. Who gave them a blank check to redefine MY language? Simple...they have done so in order to cement their usefulness. Without THEM, the layman can't understand what's going on, because the language is foreign. I think the same thing about lawyers.
As far as numbers are concerned, I will do a check, but do not promise to invest too much time unless you really need the numbers. They are not easy to find, you see.
Last edited by joG; 01-23-15 at 05:04 PM.
Ted Cruz is the dumbest person alive.
Mortgage bundling, hedging, yadda, yadda, yadda...man, about 98.017432 percent of the people don't understand how any of these financial instruments/tranactions work. Hell, most people don't know about call and put options, arbitrage theories, leveraging, etc.
Why don't you begin with what your definition of "derivatives" is...or in what context they would be used for...in "layperson terms".
And don't dump value based "underlying assets, index, or securities" on everybody.
Give some real life examples of what your trying to get opinions on.
I don't want to define derivatives because the point of this thread is to see how most people define them and how that influences their opinions on derivatives; how structures like the media have an agenda in promoting certain views of them; etc.
I'm curious about the bolded, care to elaborate your thoughts?
Unregulated Credit Default Swaps are a disaster waiting to happen as the events of 2008 show.
"You're the only person that decides how far you'll go and what you're capable of." - Ben Saunders (Explorer and Endurance Athlete)
A derivative is just a contract where the value is determined by an asset(s) or entity that has a entry value but subjected to market fluctuation ongoing. Futures contracts for commodities, forward contracts for just about any market asset, options contracts for the ability to buy a stock or asset at a later date but trade currently, credit contracts (CDS,) and asset or financial instrument swap contracts are all forms of derivatives.
They present an important speculation and hedge tool for market handling of just anything that does not have a fixed value. They get a bad name because of how *some* derivatives involve complex debt investment vehicles as the asset, and then hedged against future value of the asset in relation to the debt on the asset. The more complex the more often we get into insurance complications for the "bet."
Collateralized debt obligations originally had a strong market function to handle corporate debt and emerging market debt, it was once they moved into combinations of real estate debt, credit card debt and in some cases even student debt that things got very complicated. When it was a function of corporate debt these made good sense as they by effect normalized return on investment by collecting payments on the pool of debt in the CDO portfolio. The hedge was effectively grouping debt into structured payment for the investing party. Later when this became a function to move real estate debt onto investors to bet with it became problematic. Especially in terms of real estate debt from a prime and subprime point of view. Higher rates of return encouraged risky issuance of the new debt that eventually became collected up by the obligation portfolio. The higher the risk the higher the return, but the problem was the type of debt being issued. What that means is it was not the CDO itself that was the problem, or the mechanism it was designed to handle. Rather the problem was the type of debt being issued to secure higher rates of return and then grouped in mechanisms almost impossible to track or rate (risk and health.)
To answer your questions. CDOs did not cause the collapse, it was the source of debt within the CDOs that became problematic once real estate valuations stopped going up, defaults started happening more frequently for higher risk debt, and investment stopped buying into the bet. Real estate value going up was the hedge bet against a default, but if real estate goes down then the safety of the hedge disappears. Worse, asset accumulations often got so complex and quick as some CDOs included either parts of or entire other CDOs as a series of debt investments rolled up into one. Sometimes referred to as CDO "squared." Because a CDO is an asset, their evaluations day to day was complex. To answer another question of yours, they are also not zero sum games. In this type of derivative, they are mechanisms to merge investment capital with risk from a debt portfolio.
"Every time something really bad happens, people cry out for safety, and the government answers by taking rights away from good people." - Penn Jillette.