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those numbers are really bad measures of risk. those are probably notionals on derivatives. if you're trading a swap, the notional may be 100B, but the amount a
by andylei 15y ago
those numbers are really bad measures of risk. those are probably notionals on derivatives. if you're trading a swap, the notional may be 100B, but the amount actually at risk may be something like 10 bps, which is just 100MM.
Also, its not like if the market crashed, all of the value of the derivatives go to zero. Derivative holdings always have counterparties. If you make 100MM, someone else loses 100MM and vice versa. this isn't foolproof, as there is counterparty risk, but it makes the system a lot more stable than your statistics make it seem.
TLDR: The total risk of the derivative market is nowhere near 20X GDP.
- nhebb 15y agoI'm not challenging you on this, but I still remember Buffet's comment from years ago that they were weapons of mass destruction. What is the risk and how do regulators ensure that any untoward risk is mitigated?
- steve8918 15y agoBuffett makes a great deal of cash flow from writing options, so take what he says with a grain of salt. "The brilliance behind Buffett’s investment in Berkshire is astounding. He effectively used (and uses) Berkshire as the world’s largest option writing house. The premiums and cash flow from his insurance business created dividends that he could invest in other businesses. But Buffett wasn’t just buying Coca-Cola and Geico as many have been led to believe. Buffett was placing some (short-term AND long-term) complex bets in derivatives markets, options markets, and bond markets." http://pragcap.com/the-many-myths-of-warren-buffett http://pragcap.com/the-many-myths-of-warren-buffett
- TDL 15y agoBelow is a link describing the "netting" effect that occurs in the derivative markets. https://derivativedribble.wordpress.com/2008/10/24/netting-demystified/ https://derivativedribble.wordpress.com/2008/10/24/netting-d...