Market for derivatives grows at fastest pace in nine years, to $516 trillion

International Herald Tribune ^ | November 23, 2007 | Kabir Chibber

[Toddsterpatriot]

Bloomberg News has requested that Free Republic allow no material originating from Bloomberg News to be posted here.

[Toddsterpatriot]

The amount at stake in the entire derivatives market is $11.1 trillion

Out of $516 trillion? Maybe Nic can explain how that can be?

[Toddsterpatriot]

Ping!

[oblomov]

They must mean $516 billion. There isn’t $516 T of wealth in the entire world.

[RightWhale]

There is not $500 trillion on the planet. Maybe if they count all the gold that will be mined, and all the oil that will be lifted, and all the subdivisions that will be built, and all the cars that will be manufactured, and all the corn that will be harvested, etc.

[MrPiper]

I really wish I understood this crap. Can someone advise a book?

[Mr. Jeeves]

Derivatives involve the use of leverage for buying and selling risk - the potential loss on a derivative can be much, much higher than the value of the underlying asset. 516 trillion is the amount every derivative holder would lose if every derivative bet went bad - virtually impossible since many of the positions are bets against the opposite position held by other derivative holders. Someody goes broke - somebody gets rich.

The number reminds me of when you hear that we owe retirees 54 trillion dollars in Social Security and Medicare benefits in 40 years...well, no we don't. Politicians have promised that, but the only way such a debt could ever be paid is in vastly inflated dollars.

[theBuckwheat]

A lot of these trillions are balanced contracts. A lot of them are individually negotiated contracts, addressing specific and narrowly defined risks. Like the nonsense “trade deficit”, the total of these contracts is a worthless statistic.

[narses]

Shhhhhh, crying “CALM” in the middle of a panic is against the rules.

[bvw]

John Law couldn’t have said it better.

[SuziQ]

Quant ping!

[Toddsterpatriot]

Derivatives involve the use of leverage for buying and selling risk - the potential loss on a derivative can be much, much higher than the value of the underlying asset.

I think you might have that exactly backwards.

516 trillion is the amount every derivative holder would lose if every derivative bet went bad -

No, not really.

[Toddsterpatriot]

They must mean $516 billion.

No, trillion is correct.

There isn’t $516 T of wealth in the entire world.

I know.

[Toddsterpatriot]

the total of these contracts is a worthless statistic.

Shhhh, if the doom and gloomers hear you, they'll accuse you of being a government shill. LOL!

[Travis McGee]

Did you catch the Thursday hearings featuring Paulson, Cox and Bernanke? It's on CSPAN rotation, you might want to watch it.

“Derivatives have permitted financial risks to be unbundled in ways that have facilitated both their measurement and their management…. As a result, not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.”

~~Alan Greenspan, May 2003

“The use of a growing array of derivatives and the related application of more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions.”

~~Alan Greenspan, May 2005

“Several brokerage houses tumbled; blue-sky investment companies formed during the happy bull market days went to smash, disclosing miserable tales of rascality; over a thousand banks caved in during 1930, as a result of marking down both of real estate and of securities; and in December occurred the largest bank failure in American financial history, the fall of the ill-named Bank of the United States in New York.”

~~"Only Yesterday: An Informal History of the 1920’s" by Fredrick Lewis Allen

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

~~Ludwig von Mises

[Toddsterpatriot]

There is not $500 trillion on the planet.

I agree.

Maybe if they count all the gold that will be mined, and all the oil that will be lifted, and all the subdivisions that will be built, and all the cars that will be manufactured, and all the corn that will be harvested, etc.

Think of it like a sports bet. Say you bet $100 on the NBA All Star Game. Your risk is $100. The risk of the person you bet with is also $100. The notional value of the bet might be the value of every team in the league....the value of the entire NBA. Billions and billions of dollars.

Wow, how can you ever cover that bet?

That's kinda how they count derivatives.

[groanup]

I see the usual cadre of nattering chicken littles are running around this thread trying to catch pieces of the falling sky. Derivatives spread risk. I guess they think the reinsurance markets will be the death of us all too.

[Toddsterpatriot]

Did you catch the Thursday hearings featuring Paulson, Cox and Bernanke? It's on CSPAN rotation, you might want to watch it.

Why? So we can see idiots in Congress who understand less than you (hard to believe, I know) ask stupid questions?

[Toddsterpatriot]

I’m just waiting for the respected researcher to show up. LOL!

[Travis McGee]

Yeah, this is all a big joke about nothing. Just like you told us last year, when you touts were saying real estate was rock solid, right?

Cox, Bernanke and Paulson were stuttering,twitching and sweating bullets, all because this is so humorous.