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> Like a software system, it's extremely naive to think that complexity is a sign that a system is rotten. The reality is, the derivatives market is larger tha

by obrero 11y ago

> Like a software system, it's extremely naive to think that complexity is a sign that a system is rotten. The reality is, the derivatives market is larger than the actual market. More capital is invested in calls guessing if Google is going up than is actually invested in Google. This is a sign something is rotten. This article from 2008 has a lot of interesting data from after the subprime crash ( http://monthlyreview.org/2008/12/01/financial-implosion-and-stagnation http://monthlyreview.org/2008/12/01/financial-implosion-and-... ). It then has an analysis of that data. Whether or not you agree with the analysis, the data it points to is interesting.

kazagistar 11y ago
Out of curiosity, where does the capital sit when it is "invested in derivatives"?
- bagels 11y ago
  With whoever sold the derivative.
- innguest 11y ago
  The size of the global derivatives market is 1.5 quadrillion dollars. Global GDP is not even $90 trillion. 90,000,000,000,000 GWP 1,500,000,000,000,000 global derivatives Do you think it got that far by "sitting"? It gets reinvested ad infinitum.
  - retube 11y ago
    > The size of the global derivatives market is 1.5 quadrillion dollars No. No it is not. No 1,000,000,000 times. NOTIONAL DOES NOT EQUAL MARKET VALUE. It's also completely meaningless as most trades offset. Trades are rarely torn up, you just do a new one to offset your risk. E.g GS vs JPM: they probably have 100bn of notional with each other. Actual risk? very little as the vast majority of trades just offset. Current outstanding derivative notional is more like a measure of all notional that's historically traded. Anyhow that aside, notional is STILL a meaningless number. It tells you nothing about the risk or market value of the trade.
    - vasilipupkin 11y ago
      Yeah. It's a little bit amusing when people equate "I don't understand anything whatsoever about finance and have no desire to understand it" with "it is extremely complex". There is nothing complex about notional value of a derivative vs its market value. 2008 happened not because finance is complex, but because financial bets always incur a degree of risk and that risk sometimes materializes. Anyone who ever extended a loan to anyone else takes a risk that the loan will not be paid back. Sometimes, it isn't paid back
    - deleted 11y ago
      [deleted]
kristjansson 11y ago
The nominal value of the notes in the derivatives market is extremely large. However, we can't equate $500B notional of e.g. CDS written against Apple debt with $500B of Google stock. The CDS represents (1) to the seller, an small initial premium and a large, extremely low-probability liability requiring some collateral, and (2) a stream of future payments from or to the buyer, depending on the cost of insuring the debt. Up until a credit event, the only money exchanged is the premium, and perhaps some collateral, both of which are (for highly rated debt) orders of magnitude smaller than the notional value of the contract.
- jcbrand 11y ago
  > and a large, extremely low-probability liability requiring some collateral Having read up on the topic, the problem appears to be that this probability cannot be accurately determined, due to useless models being used (e.g. Normal distribution to model complex phenomena). So the probability is often not so low as the financial experts think. Besides that, it does happen that the liability becomes due, as in the 2007/2008 GFC. People were shocked because their models indicated that such an event should practically never happen (due to it being of such low probability). When the liability is due, the whole system collapses (as it did in 2007/2008) because the collateral that is held is often not worth what it's is marked up to be. So the whole system is fragile and prone to systematic collapse. Sounds pretty rotten to me.
  - cmdkeen 11y ago
    Well it gets more complex when you add mark to market into the mix. Plenty of the financial products that "blew up" in 2007/2008 were actually very profitable for those able to hold on to them.

by obrero 11y ago

kazagistar 11y ago

Out of curiosity, where does the capital sit when it is "invested in derivatives"?

bagels 11y ago
With whoever sold the derivative.
innguest 11y ago
The size of the global derivatives market is 1.5 quadrillion dollars. Global GDP is not even $90 trillion. 90,000,000,000,000 GWP 1,500,000,000,000,000 global derivatives Do you think it got that far by "sitting"? It gets reinvested ad infinitum.
- retube 11y ago
  > The size of the global derivatives market is 1.5 quadrillion dollars No. No it is not. No 1,000,000,000 times. NOTIONAL DOES NOT EQUAL MARKET VALUE. It's also completely meaningless as most trades offset. Trades are rarely torn up, you just do a new one to offset your risk. E.g GS vs JPM: they probably have 100bn of notional with each other. Actual risk? very little as the vast majority of trades just offset. Current outstanding derivative notional is more like a measure of all notional that's historically traded. Anyhow that aside, notional is STILL a meaningless number. It tells you nothing about the risk or market value of the trade.
  - vasilipupkin 11y ago
    Yeah. It's a little bit amusing when people equate "I don't understand anything whatsoever about finance and have no desire to understand it" with "it is extremely complex". There is nothing complex about notional value of a derivative vs its market value. 2008 happened not because finance is complex, but because financial bets always incur a degree of risk and that risk sometimes materializes. Anyone who ever extended a loan to anyone else takes a risk that the loan will not be paid back. Sometimes, it isn't paid back
  - deleted 11y ago
    [deleted]

kristjansson 11y ago

The nominal value of the notes in the derivatives market is extremely large. However, we can't equate $500B notional of e.g. CDS written against Apple debt with $500B of Google stock. The CDS represents (1) to the seller, an small initial premium and a large, extremely low-probability liability requiring some collateral, and (2) a stream of future payments from or to the buyer, depending on the cost of insuring the debt. Up until a credit event, the only money exchanged is the premium, and perhaps some collateral, both of which are (for highly rated debt) orders of magnitude smaller than the notional value of the contract.

jcbrand 11y ago
> and a large, extremely low-probability liability requiring some collateral Having read up on the topic, the problem appears to be that this probability cannot be accurately determined, due to useless models being used (e.g. Normal distribution to model complex phenomena). So the probability is often not so low as the financial experts think. Besides that, it does happen that the liability becomes due, as in the 2007/2008 GFC. People were shocked because their models indicated that such an event should practically never happen (due to it being of such low probability). When the liability is due, the whole system collapses (as it did in 2007/2008) because the collateral that is held is often not worth what it's is marked up to be. So the whole system is fragile and prone to systematic collapse. Sounds pretty rotten to me.
- cmdkeen 11y ago
  Well it gets more complex when you add mark to market into the mix. Plenty of the financial products that "blew up" in 2007/2008 were actually very profitable for those able to hold on to them.