[Jimmy Valentine]

I wonder about this. A well managed derivatives portfolio hedges against interest rate risk. Most banks I am familiar have a very sophisticated system to manage derivatives and it is not static, it is adjusted daily.

I think that China, with almost a TRILLION dollars in bad loans impacting their banking system is a much higher risk.

In any event, I would not invest in China or Europe for that matter.

[ventana]

Where would you invest? V’s wife.

[baltoga]

The author’s contention seems a bit far fetched. He links loans, debt securities and hedge funds and then assumes any sudden change would result in a “domino effect” resulting in the collapse of the whole European credit market.

The more likely scenario is that investors who happily plunged their money on the promise of 20% returns will get a rude awakening that “past performance is no indicator of future performance”.

[ikka]

I think the weak link in derivatives is that the liquidity needed in the event of a problem, is not always there.

Assume that Turkey has a problem, so you sell your Danish CMO (collateralized mortgage obligation) holdings - you are dependent on there being another buyer, able to buy up the entirety of your holdings at the price you want. If you have a lot of Danish CMOs, the market might not be able to absorb all the ones you want to sell, meaning either that you will not sell them , or will have to sell them for less.