Your Opinion On 'Derivatives'

Terrafaux said:

Conceptually ("meta-theoretically", maybe definitionally as a synonym too), derivatives are simple. I'm talking about the idea of derivatives in that post you quoted, not their implementation in practice. Complexity arises in the models which are used to simulate, estimate, quantify and evaluate derivatives, but the purpose, let's say, of derivatives should be simple to wrap one's head around, if that clears things up.

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?

Cheers

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Won't define derivatives so as not to influence opinions? Gosh, that's sweet of ya.

"Derivatives are not simple". Don't care how many times you claim them to be.

If derivatives were so simple we'd see ongoing threads in every message board in existence about how everybody's derivatives, in whatever function they chose to use them, has either added to their financial health or has reduced it. That's simply not the case. Nor will it ever be.

So let me take the easy way out in moving this thread along. Read the following:

Derivatives used as a hedge allow the risks associated with the underlying asset's price to be transferred between the parties involved in the contract.

Commodity derivatives are used by farmers and millers to provide a degree of "insurance." The farmer enters the contract to lock in an acceptable price for the commodity; the miller enters the contract to lock in a guaranteed supply of the commodity.

Some derivatives are traded on national securities exchanges and are regulated by the U.S. Securities and Exchange Commission.

Other derivatives are traded over-the-counter. These derivatives represent individually negotiated agreement between parties.

What is a derivative?

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Now, you pick one of the above means of using derivatives and share with us just how simple they are...and give us examples of how we can all JUMP INTO THE DERIVATIVES GAME and enjoy the simplistic and fun way of playing with derivatives while passing one's time away between making posts on the message board or forums.

Here's one... I'll set up some predatory company linking unqualified borrowers with lending institutions who will profit off of failed loans. Then...and now here comes to fun part...I'll make a bet (using derivatives) that most subprime borrowers will default on their loans.

I don't understand what you'll accomplish by getting people's opinions about an instrument that can be used in so many different ways.

How is understanding derivatives relative to the vast majority of people who don't have the knowledge or resources to indulge in derivatives?

Terrafaux said:

I'm curious to know what your opinion on derivatives is based on your understanding of what derivatives are. The term is bandied around quite loosely in the media, meaning there's much confusion about their technical applications and functions, scope, and nature, which is part of why I am asking this question.

Do you associate derivatives with the 2008 crisis? Smoke-filled rooms and Fed conspiracies? Do you reflexively react negatively at their mention? Are they a method to accumulate wealth riskily but quickly? Simply financial instruments of specified conditions which all private individuals involved can benefit from? Perhaps only a single party can benefit, thus representing some form of zero-sum approximation?

If you consider yourself well-versed in economics/finance, I'd appreciate you mentioning that in your post, especially.

Cheers

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I associate derivatives with calculus.

Redress said:

I associate derivatives with calculus.

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What is the first derivative of x cubed?

Declan said:

What is the first derivative of x cubed?

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Ask me 25 year ago ad I might have been able to answer you. I have long dumped almost everything I learned about calc.

Terrafaux said:

I'm curious to know what your opinion on derivatives is based on your understanding of what derivatives are. The term is bandied around quite loosely in the media, meaning there's much confusion about their technical applications and functions, scope, and nature, which is part of why I am asking this question.

Do you associate derivatives with the 2008 crisis? Smoke-filled rooms and Fed conspiracies? Do you reflexively react negatively at their mention? Are they a method to accumulate wealth riskily but quickly? Simply financial instruments of specified conditions which all private individuals involved can benefit from? Perhaps only a single party can benefit, thus representing some form of zero-sum approximation?

If you consider yourself well-versed in economics/finance, I'd appreciate you mentioning that in your post, especially.

Cheers

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They're nothing new and are still around with major Wallstreet Banks holding Trillions in interest backed derivatives. ( One of the primary reasons the FED is still manipulating the money supply )

They were NOT the cause of the 2008 Subprime mortgage crisis.

Redress said:

I associate derivatives with calculus.

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Integral and proportional too !!

I miss my old Calclus teacher

whysoserious said:

You can leverage positions via derivatives:


In this case, you can leverage mortgage-backed securities by buying credit-default swaps. There is only one mortgage-backed security, since they represent a real thing: the securities contained within. However, you can buy as many CDS as the market will sell since it is a bet on the success of the MBS.

It's leveraging because you can buy into extremely large positions with a small amount of money (or no money).

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Investment Banks holding MBSs by LAW had to collateralIize those securities while they were in their possession ( portfolios )

They did that via CDSs.

Fenton said:

Investment Banks holding MBSs by LAW had to collateralIize those securities while they were in their possession ( portfolios )

They did that via CDSs.

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The idea that you can use a credit-default swap that bets on the success of the underlying as collateral for the underlying is beyond me. I sincerely hope that's not true. Usually people use underlying positions to collateralize derivatives, I thought - not the other way around.

whysoserious said:

The idea that you can use a credit-default swap that bets on the success of the underlying as collateral for the underlying is beyond me. I sincerely hope that's not true. Usually people use underlying positions to collateralize derivatives, I thought - not the other way around.

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They were and are essentially insurance policies on the underlying assets. Government regulations mandated that these Securities be collateralIzed.

Interesting enough, the only two Financial entities that were not forced to collateralIzed their securities were Fannie and Freddie. WE got stuck with their losses.

On a side note, Credit derivatives held now by investment banks dwarf the amount of MBSs derivatives that nearly collapsed the economy back in 2008.

I acute hike in interest rates wouldn't just bankrupt the FED but would bankrupt major Wallstreet institutions.

Most need to be banned.

Insuring a loan is impossible. If you loan, YOU take the risk. NOT the tax payers.

The rest regulated. Only allow new ones after 10 years of testing.

They are the root of all evil in 2008 total meltdown.

But no one knows what they are.

Read "The big short" and "Reckless endangerment" .

KevinKohler said:

Derivatives "cancel" each other out...meaning, SOMEONE wins, and SOMEONE loses.


If the loser is "too big to fail"....

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That is the case at face value. Usually there is a further dimension, however.

Each party to the deal improves their position by the transaction. The most straight forward case is the case of a forward, wth which each side reduces their risk. One sells Dollars he knows he will receive in three months, when he ships the finished Porsche to the American dealer. The other sells Euros she knows she will get for consulting the Dutch government on software security. One of the two will certainly "loose" in the sense of having had a better exchange rate had they waited. But both are better off, because the knew from the start that they would not "loose" in the sense of not being able to pay their bills, when the job was done. The risk of receiving Euros at a set rate instead of at the better rate is not a problem for Porsche. Their risk was that the rate might fall and that they would not have the cash to pay their workers and would have to let them go.
This actually happened to Porsche before they started hedging and they almost bancrupted.

Fenton said:

Integral and proportional too !!

I miss my old Calclus teacher

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My God. Was she cute!

274ina said:

Most need to be banned.

Insuring a loan is impossible. If you loan, YOU take the risk. NOT the tax payers.

The rest regulated. Only allow new ones after 10 years of testing.

They are the root of all evil in 2008 total meltdown.

But no one knows what they are.

Read "The big short" and "Reckless endangerment" .

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The root evil, if you want to see evil was the Greenspan/Clinton bubble of which 2008 was the second crest. That US legislation caused more mortgages to be granted than would likely be paid back was a secondary incendiary. Derivatives were only a minor factor, really. Even the guarantees sold by aig and a number of moniline insurers that are a type of derivative or insurance policy were only add on to the underlying negative forces.

KevinKohler said:

For instance....I have a rare comic book worth 1,500 bucks. Another guy has another rare one worth the same, but it's not the same comic as mine. If we were to agree to exchange the VALUE of our comics, but not the comic itself, at a later date, that would be a derivative.

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So the other guy has a book worth $1,525. What is the "value" that is being exchanged? He gives you $1,525 while you give him $1,500?

Why would he do that when he would lose $25?

joG said:

The root evil, if you want to see evil was the Greenspan/Clinton bubble of which 2008 was the second crest. That US legislation caused more mortgages to be granted than would likely be paid back was a secondary incendiary. Derivatives were only a minor factor, really. Even the guarantees sold by aig and a number of moniline insurers that are a type of derivative or insurance policy were only add on to the underlying negative forces.

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First came the derivatives, THEN corps planted people in Gov to increase the "deals", (more fake mortgages), to increase derivatives profits.
they did not care at all about home sales, or people at all.

Read Reckless endangerment.

To eliminate this "deal" incentive, you must eliminate all derivatives in home sales.

of course the real solution is this. Ban the Mortgage.



No mortgage. No leeching banker. N o wall street. USA did it for 100 years, we can do it again.

274ina said:

First came the derivatives, THEN corps planted people in Gov to increase the "deals", (more fake mortgages), to increase derivatives profits.
they did not care at all about home sales, or people at all.

Read Reckless endangerment.

To eliminate this "deal" incentive, you must eliminate all derivatives in home sales.

of course the real solution is this. Ban the Mortgage.

View attachment 67179407

No mortgage. No leeching banker. N o wall street. USA did it for 100 years, we can do it again.

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You sound like the guys that promise murder will stop, when guns are forbidden.

274ina said:

First came the derivatives, THEN corps planted people in Gov to increase the "deals", (more fake mortgages), to increase derivatives profits.
they did not care at all about home sales, or people at all.

Read Reckless endangerment.

To eliminate this "deal" incentive, you must eliminate all derivatives in home sales.

of course the real solution is this. Ban the Mortgage.

View attachment 67179407

No mortgage. No leeching banker. N o wall street. USA did it for 100 years, we can do it again.

Click to expand...

We also had slavery. We had no women in the workforce. We had child labor. We had 80 hour work weeks.


Just because we used to do something, doesn't mean it was good.


You can't tell me I'm not allowed to lend something that is mine to someone else.

joG said:

You sound like the guys that promise murder will stop, when guns are forbidden.

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When financial crimes are perfectly legal, then they are rampant.

Watch Front line - catching a Trader.

Funny how criminal negligence does not apply to wall street.............only main street.

KevinKohler said:

We also had slavery. We had no women in the workforce. We had child labor. We had 80 hour work weeks.


Just because we used to do something, doesn't mean it was good.


You can't tell me I'm not allowed to lend something that is mine to someone else.

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Yes the Gov can regulate financial products.

Yes you can loan to certain people, (Hamas or drug dealers not allowed you know) and no you should not be able to insure the loan. (ban CDO'CDS)

274ina said:

Yes the Gov can regulate financial products.

Yes you can loan to certain people, (Hamas or drug dealers not allowed you know) and no you should not be able to insure the loan. (ban CDO'CDS)

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Now you're saying that I can't extend a service I offer for specific reasons.

INSURING a loan is not the problem....FAILING to follow up on the promise MADE due to making TOO MANY, is the problem.

KevinKohler said:

Now you're saying that I can't extend a service I offer for specific reasons.

INSURING a loan is not the problem....FAILING to follow up on the promise MADE due to making TOO MANY, is the problem.

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No, leveraging that insurance 100x with credit-default swaps is the problem.

KevinKohler said:

Now you're saying that I can't extend a service I offer for specific reasons.

INSURING a loan is not the problem....FAILING to follow up on the promise MADE due to making TOO MANY, is the problem.

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Yes, just like you have to have min standards for car, life, and home insurance. The GOV has t regulate.

No min asset requirements in fantasy dirivitives, but for other normal insurance yes, they must pay out.

Only thing I can see for loan insurance is the lloyds of London system. Other wise ban them.