View Poll Results: What is your opinion on financial derivatives?

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  • All types of derivatives are dangerous & can cause serious damage to an economy

    73 62.39%
  • Certain types of derivatives are OK, but other, more complex types lead to major trouble

    40 34.19%
  • They are not dangerous & should only be the business of those involved

    0 0%
  • Other (please state)

    4 3.42%
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Thread: Your Opinion On 'Derivatives'

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    Your Opinion On 'Derivatives'

    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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    Re: Your Opinion On 'Derivatives'

    Only derivatives I am familiar with are the Mathematical ones... the equation of the slope. They and it's inverse, integrals, open up the door to all higher level Mathematics. I have a B.S. in Physics.

    But I am sure that's not what your looking for xD.

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    Re: Your Opinion On 'Derivatives'

    Quote Originally Posted by Terrafaux View Post
    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
    Derivatives are a very useful and highly potent instrument for managing and reallocating risk. Employed incorrectly you can do huge harm.

    I have worked with derivatives as a user, designer, analyst and have advised on regulation and law.

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    Re: Your Opinion On 'Derivatives'

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    Re: Your Opinion On 'Derivatives'

    A derivative is a contract between two people to exchange something, usually money (liquidity) at a specific date, based on the value of specific items.


    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.

    Were it all went haywire was people were making these derivative "bets" for "securities"...those toxic bundled mortgage loans...and THEN insuring those "bets" against losses.

    I'm less upset with the bet itself, and more upset that an insurer would have been so foolish as to say, yeah, no problem, we'll cover you if you lose. And even THAT isn't completely upsetting...I mean, if someone wants to offer me a service, go for it. But as we all saw, the result as that we had this HUGE house of cards built atop ONE facet of our economy...home loans.
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    Re: Your Opinion On 'Derivatives'

    I will say I think all trading should be on the up & up. No dark room trades, no OTC, etc. All trades should be exchange sanctioned, regulated, and understood.

    That being said, some derivatives have actual value. Options can be useful for hedging positions (covered calls). Futures can be useful for businesses to assure that 6 months down the line, they can sell their product at a respectable level.

    Most derivatives are not used in the economy helping way I have listed above. They are mostly used as a way to leverage themselves or earn money risk-free.
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    Re: Your Opinion On 'Derivatives'

    Quote Originally Posted by KevinKohler View Post
    A derivative is a contract between two people to exchange something, usually money (liquidity) at a specific date, based on the value of specific items.


    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.

    Were it all went haywire was people were making these derivative "bets" for "securities"...those toxic bundled mortgage loans...and THEN insuring those "bets" against losses.

    I'm less upset with the bet itself, and more upset that an insurer would have been so foolish as to say, yeah, no problem, we'll cover you if you lose. And even THAT isn't completely upsetting...I mean, if someone wants to offer me a service, go for it. But as we all saw, the result as that we had this HUGE house of cards built atop ONE facet of our economy...home loans.
    Of course, it was more the housing loans than the derivatives that were the problem.

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    Re: Your Opinion On 'Derivatives'

    Quote Originally Posted by joG View Post
    Of course, it was more the housing loans than the derivatives that were the problem.
    How is that? How much money was lost via housing vs the securities?

    I'd really like a number, but I can't find one myself. I feel like the answer would definitely be from the CDS and the mortgage-backed securities.
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    Re: Your Opinion On 'Derivatives'

    Quote Originally Posted by Terrafaux View Post
    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
    I don't think there's anything inherently bad about derivatives.

    It's like asking is debt bad. It depends and it's centered on what amount of risk you are willing to take on.

    I think what can be dangerous about derivatives is that depending on the side of the contract you're on you can be assuming a lot more risk than you assumed and calculating that level of risk can be difficult to do.
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    Re: Your Opinion On 'Derivatives'

    Thanks for the responses so far. I don't want to add much personal opinion here, but from my experience people who think derivatives are "evil" simply don't understand them, or associate all derivatives with fixed income securities derived from loans, or hazy geared derivatives, or so on. As already pointed out (most) derivatives are very simple and useful.

    Buffett described derivatives as "financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal." But what he meant by this was not all derivatives, but certain classes of derivatives like collateralized debt obligations (CDOs, relatedly CMOs, CLOs, etc), sophisticated mortgage tranches, and so on i.e: instruments not very similar to the forward/swap/option paradigm of traditional derivatives.

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