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Why would a derivatives exchange not accept cash? what are people buying those derivatives with? Furthermore, how could any bond (or anything at all for that m
by TheSoftwareGuy 7y ago
Why would a derivatives exchange not accept cash? what are people buying those derivatives with?
Furthermore, how could any bond (or anything at all for that matter) be less risky than cash? the market value of a bond may change over time but $1 will always be worth $1. Inflation may change the purchasing power of that dollar but then the exact same mechanism will effect the bonds as well.
- dmoy 7y agoCash has risks: * risk of physical destruction * risk of physical theft * risk of forgery etc etc There's some nonzero cost to accept, handle, vet, store, etc for cash. That's not even including if there are extra reporting laws or other for large amounts of cash, which just adds to the overhead.
- jonathankoren 7y agoThese are all concerns with paper, not “cash” as it’s commonly considered in finance. Have $xx,xxx in a checking account at a national bank. It’s a database entry, not a pallet of pennies. Furthermore, with fractional reserve banking, I sincerely doubt if there’s enough coins and bills in the country to account for the total “cash” in all the accounts, let alone all the assets. Similarly, everyone involved in these transactions have access to the same banking system. There’s no reason you need to fly a C-5 with pallets of Swiss francs around. (Even then, it seemed absurd since both governments could access Swiss banks.)
- JumpCrisscross 7y ago> Have $xx,xxx in a checking account at a national bank At the scales of financial infrastructure, bank deposits are not cash. They are debt issued by banks. The point of collateral is to give a bank’s word weight.
- perl4ever 7y agoOr, based on what I read in financial statements, "cash" and "short term securities" kind of blur together. Cash is more of a general category of things that are suitable to use for similar purposes, than one specific thing.
- dmoy 7y agoSure but then you just introduced a completely different type of risk, which is the collapse of that bank.
- jonathankoren 7y agoBank collapse is pretty rare. Even accounting for 2008, there’s now a de facto government insurance plan for banks. i.e. Too big to fail.
- dmoy 7y agoBanks collapse often in the US. There have been 63 since 2008 with over a billion in assets. 28 since 2010. In germany unless you're with DBAG it's not clear the government would step in and save you.
- dmoy 7y ago8 US banks collapsed in 2017, as another example.
- perl4ever 7y agoWikipedia has a list of the specific banks, and most of the recent ones have been quite small. e.g. The Farmers and Merchants State Bank of Argonia with about $34M in assets. The FDIC has stepped in as expected with all of these, I believe.
- dmoy 7y agoYes, but the FDIC equivalent in Germany is 100k, which doesn't help you if you're in the business of buying 30 year bonds (usually that's institution buying >10MM)
- jonathankoren 7y agoNo one buys a 10 million dollar, 30 year bond from a bank with 34 million in assets. It’s disingenuous to claim that all banks are equal in terms of capabilities, assets, or risk.
- deleted 7y ago[deleted]
- joncrane 7y agoand this is exactly why there is a market for negative yield bonds. The true decision point isn't 0%. It's the rate for the risk/cost of holding cash. BTW has there been any research toward what this rate actually is?
- Jabbles 7y agoA large amount of cash is expensive to store safely (fire) and securely (theft).
- llcoolv 7y agoNot only - AFAIR the Colombian Steve Jobs had problems with humidity too - 2.1 billion 80s' USD lost to flooding and rotting is what I would call real liquidity :D And also rats I think.
- seandhi 7y agoIt’s extremely insulting to refer to Escobar as the Colombian Steve Jobs, if that is the connection you are making.
- tdhoot 7y agoI think the answer to both your questions is because there are costs to securely storing cash. That also makes cash risky compared to bonds, where you are not responsible for the security.
- SilasX 7y agoWhy is everyone responding to the question under the same misinterpretation, that it means "cash" as in "physical banknotes" rather than "electronic Euros"? I know the principle of charity is hard sometimes, but come on.
- secabeen 7y agoBecause a bank can go under, and you can lose your money in excess of the insured amount.
- deleted 7y ago[deleted]
- SilasX 7y agoNot if it's a bank that specifically caters to this crowd and doesn't take any of the normal risks associated with lending.
- kgwgk 7y agoThey would have two options: A) keep the euro notes in their vault, which only works if you deposit paper bills in the first place B) keep electronic deposits in the ECB and pay interests to do so In either case if they give back the money to the clients when they ask for it how do you expect them to cover their operating costs (plus the interest they are charged by the central bank in case b)?
- deleted 7y ago[deleted]
- rags2riches 7y ago