[Leaning Right]

If I place a $5 bet on a game between two $1 billion dollar sports teams, is my bet somehow worth $2 billion?

Here's a better sports analogy, if I understand derivatives correctly (and perhaps nobody does). Suppose it's the New England Patriots vs. the Jacksonville Jaguars.

You issue notes, at $5 apiece, promising to pay each bearer $1 million dollars if Jacksonville wins by 35 points or more. Now suppose 1000 people take you up on that. Those folks might have bet on the Patriots, but want to hedge their bets a bit.

So now there is $1 billion dollars of derivatives on the line (the note's value is "derived" from some other value, in this case the game's final score). You better hope that Jacksonville doesn't win by 35 points or more. Because if they do, your company is going to collapse spectacularly.

[Toddsterpatriot]

You issue notes, at $5 apiece, promising to pay each bearer $1 million dollars if Jacksonville wins by 35 points or more.

$5 vs $1 million is a stupid bet.

[alexander_busek]

So now there is $1 billion dollars of derivatives on the line (the note's value is "derived" from some other value, in this case the game's final score). You better hope that Jacksonville doesn't win by 35 points or more. Because if they do, your company is going to collapse spectacularly.

Good analogy, Leaning Right!

But why stop there? Why not then "collateralized" those notes - i.e., use those notes as collateral to place downpayments on single-family dwellings - during a realestate bubble. And then "bundle" and securitize those mortgages?

Regards,