What would be the implications potentially? http://www.abc.net.au/news/2014-06-12/kohler-controlling-derivatives/5515666 $710 trillion: that's a lot of exposure to derivatives " The leverage problem facing the global economy these days is not excessive lending on housing, as it was in 2005-06, but exposure to derivatives, writes Alan Kohler. ... And last week the Bank for International Settlements revealed that the amount of over-the-counter (OTC) derivatives outstanding reached $US710 trillion at the end of 2013, a 12 per cent increase on the year before. "
Its just a bunch of plus and minuses that evens out. Its like saying someone with $100K that trades 4million shares worth $100million each week is insanely leveraged.
Notional does not indicate a lot in terms of risk. I can trade a product with a billion notional, but if the payoff is capped at 2%, the maximal profit/loss depending on which side you look at is âonlyâ 20 million.
If instead, the quantity had been referred to as "point 7 quadrillion", that would really be bearish. :eek:
Not true - notional sizes given pundits an ability to write useless news articles, so it creates employment. PS. What's riskier, a 1 year USD LIBOR basis swap with a billion notional or a 1 year SPX variance swap with a 100k of notional?
The article concludes, " It's true that banks are able to use interest rate swaps to hedge their exposure to a certain movement interest rates, but for example JP Morgan's total assets are US$1.5 trillion while its exposure to derivatives is US$70 trillion, or 47 times the assets, so you'd have to think there is rather more gambling going on than hedging."
That's a pretty epic fail right there... If the author actually bothered to stop and think about it for a bit, they would conclude that they're comparing apples to chihuahuas. Furthermore, concluding that more gambling goes on than hedging based on the gross derivative notional is the height of silliness. Ah yes, good point... It also provides HeroZedge with headlines.