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I appreciate your response. Below is a definition I like of derivatives.

To your points, they are excellent and show in some part why derivatives, in their current form, should be outlawed. Lots of bankers and traders and employees of that industry will hate anybody for saying that. It’s kinda like saying beef should be outlawed. LOL, “cattlemen” will hate you!

I think I can offer up just one, of hundreds, if not thousands, of examples of a derivative that somewhat illustrate my point. Airlines try to buy jet fuel in huge amounts to cut costs. Clearly that’s a sound business practice and makes sense for their execs to do, so far. But, then along comes an institution and says to the Airline execs, “well, if you will pay us a bunch of money, we will insure you against any price increase out into some agreeable point in the future”. Airline guys say “heck yeah”.

The deal is still ok, sound and logical. But, then, the wall street banker, or Chicago or LA or London bankers (I use that term very loosely; it used to be respected), seeing some BIG BUCKS to insure that business transaction, and using their ill gotten gains to buy politicians, says “wait, we will do the deal if we can sucker the feds into insuring our risk for US. That’s where the rub is. The taxpayer’s money and depositors money should not be used for these “Crap table” games.

The airline should just buy it’s fuel and make the best deal it can WITHOUT risking the taxpayers money. The scale upon which these 3 pc suit thieves have raped these banks balance sheets (hundreds of trillions!!!) just boggles the mind. 700 trillion is what I read in one article last night. The article said that is more money that has been generated in the history of mankind for everything.

Now, yes the airlines cost of doing business will not be reduced if they can’t make sweetheart fuel buys. And, yes the price per seat will go up. But, I would rather pay a few bucks extra for my seat than see my whole world collapse down around me because of corrupt bankers, politicans, lobbyists and regulators. And, this is what some very smart guys are talking about every day these days.

The question is “Is it too late?”...........some say yes! I don’t know.

.......Derivatives are types of investments where the investor does not own the underlying asset, but he or she makes a bet on the direction of the price movement of the underlying asset via an agreement with another party. There are many different types of derivative instruments, including options, swaps, futures and forward contracts. Derivatives have numerous uses as well as various risks associated with them, but are generally considered an alternative way to participate in the market........

I agree with a lot of your post. I would say this... sometimes the derivatives are based on a position a person takes who does own the underlying equity. Sometimes the person doesn't. Those are the speculators. But it would be interesting to know what perentages of those derivatives have been placed by persons owning the underlying equity.

I knew a guy who was the vice president in marketing at a small natural gas producer. He traded futures contracts to protect his company's natural long position. He was apparently pretty good at it. At some point he began to trade futures contracts in his personal name with no equity position to back the trade. He picked a bad market cycle to start that practice. Lost house, wife, family, job.... etc etc.

We hear about banks that have trillions of dollars in derivatives on their books. My assumption would be that those are not all one sided. Most derivative traders trade both sides at some level. Who knows?

If you're a derivative trader for an oil and gas company part of your job is spreading your risk across various companies. Any company can go bankrupt. I guess... except those that are backed by tax dollars :) And those can go bankrupt too. Obammy bought GM out of trouble, but bond investors got paid pennies on the dollar.

All of this is why during my retirement I continue to move funds out of the financial market. I buy rental property. I own it outright. I generate monthly retirement income, and I'm in control of the deal. I pick the customer to do business with. I pick the terms. And I own hard assets. Not a CEO's promise.

Enjoyed the exchange. Take it easy!